Follow The Money -- Trade Where The Action Is

Let me begin with a drastic example from Jan. 3, 2001. Shortly after 1:00 p.m. ET, the Federal Reserve made a major announcement of its decision to cut interest rates by 50 basis points to 6%. The market reaction was quick and frantic. The Nasdaq Composite index shot up more than 200 points in just 20 minutes. In the same time frame (1:15 p.m. to 1:35 p.m.), Broadcom (BRCM) surged from 78 13/16 to 97; SDL Inc (SDLI) went from 142 to 173; Juniper Networks (JNPR) from 106 11/16 to 118 7/32; and CIENA Corp (CIEN) from 67 13/16 to 83 23/32. Short sellers were rushing to cover their positions desperately while daytraders and short-term traders were attempting to catch this explosive upward momentum.

When the hungry money hits its target, we can expect nothing but huge gains. Remember, all of the four stocks above had been strongly downtrending, and this spectacular rally happened in the midst of a bear market. Don't go against the hungry money. It will destroy you. Forget about the trend of the market. Don't try to rationalize the situation. Just follow the hungry money and capture the moment.

I hear some of you saying, "That sounds ridiculous. You just can't jump in the market!" Well, let me share something Larry Connors (author of Connors on Advanced Trading Strategies) told me. When I asked how he would react in a similar situation, he replied, "I would jump in, because I know where my stops are." His response surprised me -- I thought it would be more logical. A few minutes later, I realized his answer was rational. I had been paying too much attention to the first half of his answer -- especially the words "jump in." I was forgetting the part about knowing where his stops were. Nobody knows how long a rally will last. The only way to find out is by jumping in. Yes, anyone can jump in, but not everyone would place a stop immediately after jumping in. This may be the crucial difference between pros and amateurs.

For those of you who are scared to jump in, I have a way to time the entry point when facing an explosive situation. This method came from my trading experience, and later I ran across other traders who had a similar concept. I call it my "Double Three strategy." It's very simple to use and has been especially effective for daytrading. Again, this strategy works better with surging stocks.

If the same thing happens three times in a short period of time, we tend to take it seriously. Things could happen once or twice, but if they happen three consecutive times, arguably, this is no longer coincidence. That's the reasoning behind my Double Three strategy. I use three-minute charts, and I will buy the third higher consecutive close. That's it.

Let's see how the Double Three strategy worked on Broadcom (BRCM) and SDL Inc (SDLI). Broadcom made its first higher close at 1:12 p.m. (see chart below), and proceeded to make its third consecutive higher close at 1:18 p.m. I bought the stock at the 1:18 p.m. closing price of 86. At 1:21 p.m., Broadcom hit 92, and at 1:24 p.m., it was trading around 95. It was a great run.

SDL Inc (SDLI) made its first higher close at 1:21 p.m. and recorded its third higher consecutive close at 1:27 p.m. (see chart below). My entry price was the same as the 1:27 p.m. closing price of 155 1/2. SDLI exploded and hit 174 1/2 at 1:39 p.m..

Of course, we can utilize conventional methods such as pullback strategies. One thing to keep in mind is that under explosive situations, stocks often do not pull back or sell off until gains are far overextended. This example of CIENA (CIEN) is one of those rare successful pullback plays.

It may not be easy, but sometimes we have to forget conventional trading rules. Common sense says we should be looking for shorting opportunities if stocks are pulling back from their lows. But the truth is that stocks cannot go down forever. They have to reverse direction to the upside sometime. As I mentioned earlier, if the hungry money hits its target, the only result we can expect is an explosive price surge. Forget about the trend of the stock. Don't fight the hungry money. Just follow it and capture the momentum.

I would like to conclude with an insightful comment from Eddie Kwong, Editor-in-Chief of TradingMarkets.com: "It is both difficult and scary for traders to buy high and sell higher. But you simply have to accept the fact that there are days when the market gets caught in a tornado. In a tornado, stationary objects are pulled loose from their foundations and taken for a ride to unexpected places. The traditional rules and patterns don't apply on those days because they are purely momentum-driven. Stocks that are in motion will continue as such. Nimble daytraders will earn more on these days than they do in typical week. On such days, you have to suspend your search for conventional setups and simply 'go where the action is.' Going where the action is is an art that is only learned through experience."

Good luck and happy trading.

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