Thursday, February 05, 2009

Big Bullish Reversal From Under 8000 in the Dow

Top Line: The market wants to go stayed under 8000 for about an hour and a half.

Thursday was one of those days that we wait for. These days come up once in a while. The good trading opportunities like this are particularly enjoyable because they involve immediate gratification.

When CSCO announced earnings on Wednesday evening, the market, not just CSCO, dropped hard. How many times have we seen the market drop or pop at the open just to completely reverse itself right away. Just as a matter of review, we thought we would just take a look at the few opportunities we considered.

After putting the Update to bed last night, we put ourselves to bed and thought about what makes the most sense given the facts. Here's what we thought. We didn't really want to trade CSCO but as it turned out that was an ok idea, too, especially if you had purchased it in the after hours on Wednesday.

What we did think was that there were a few ideas that made sense. Sometimes you just don't have time to come up with very many. What you do is watch several things and choose something that gives you good probability of success. To us, this was going to be a two hour trade or maybe less so we don't need or want to understand the fundamentals.

Anyway, we had a notion that the Q's would be a good vehicle because CSCO is part of the Q's. The choice would then be the QLD which moves twice as much as the Q's themselves. Another choice was the SSO which moves twice as much as the SP500. Both of these ideas worked pretty well but there was another that we considered as well.

We have been watching the financials for a long time, several years. This pursuit has led us to watch the top banks in the last several months. The one we picked was Bank of America (BAC). We decided that if BAC dropped below 4, we would take a quick trade on it. Of course, it did trade down to 3.77 which was definitely below 4 but we Didn't have an order in to take advantage of it. From there BAC jumped to nearly 5 during the day. Unfortunately, we didn't really have an exit strategy either but any one of these three ideas (four if you count Wednesday's after hours CSCO trade) would have been profitable given you would have gotten out after the market jumped.

This blog is not really about short term trading like this but once in a while, these types of trades can really enhance your they're fun. Ok back to work...

Thursday, GDX closed at the highest price since we have owned it. GDX has traded higher than today's close but the stock has not closed this high before. If you look at a chart of GDX with its 200 day SMA (simple moving average), you will see that for the last few weeks it has been bumping up against its 200 day SMA. One of these days the GDX will pop over that line and try to turn it up. Generally a stock wants to stay close to its 200 day SMA which was one reason we really liked it back in the fall.

The stock market is getting ready to go much higher. The idea that the Dow wants to go much below 8000 has been refuted for the past several weeks. The sellers are Hoping that the market goes down so they can buy. They will end up buying at much higher prices and they will most likely be buying from us.

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