The type of market we are in will have an effect on the strategies that
many traders will use.
If we are in a sideways pattern, some traders will abandon moving averages
or another trend following method.
I am basically a Trend Trader. I am looking for a trend and will accept the
problem of whipsaw associated with sideways markets.
I also realize that we have a market of stocks, not necessarily a stock
market.
Look at Friday as an example. IBM breaks support and closes down 4 5/8 or
3.5%. Dell Computer Corporation, (DELL) was up 4.5% or 2 1/8 on the same day.
My point here is to find indicators and pattern that you can establish
sound systematic strategies knowing that they working better during some
markets and not as well in others. Over the long run, if your strategies
have sound foundation and cuts losses, you should prevail in the long run.
One example of stocks going in different directions is the stocks in the
Philadelphia Semiconductor Index. The Semiconductor Sector is a
price-weighted index composed of 16 U.S. companies that are primarily
involved in the design, distribution, manufacture, and sale of
semiconductors. SOX include some of the largest and most widely-held U.S.
semiconductor stocks.
These stocks include Altera ALTR, Applied Materials AMAT, Advanced Micro
Devices AMD, KLA-Tencor KLAX, Linear Technology LLTC, Lattice Semiconductor
LSCC, LSI Logic, LSI, Motorola MOT, Micron Technology MU, National
Semiconductor, NSM, Novellus, NVLS, Rambus RMBS, Teradyne, TER, Texas
Instruments TXN, Xilinx, XLNX.
Some of these stocks are breaking out to new highs and others are breaking
below support. The only strategy that makes sense to me is to evaluate each
stock separately and stay the course with your plan.
Channel Breakouts
Channel Breakouts are a popular method of trading stocks. The principal
behind a Channel Breakout is that when a stock trades above the highest
price or below the lowest price in the last N (number of periods) number of
periods, a new trend may be starting to take place.
This channel trading method can be used in any number of periods from
minute bars to weekly time frames.
The results of using such a method will often result in a stock moving
above a defined resistance or below a defined support area.
I feel that with any pattern, indicator, or strategy, the key is to
recognize when it works and when it doesn’t. A pattern or indicator
tested over a long period of time may only have a 50-50 chance of working
out in a trader’s favor. A key to successful trading is to limit
losses with stops and recognize when the pattern or indicator did not
perform as expected.
I like using a 20 period breakout.
Let's look at Altera Corp. (NASDAQ: ALTR).
ALTR is an good example of a stock that goes into a congestion pattern and
then breaks out to new highs. It then hits another sideways pattern, but
keeps breaking to new highs. Besides the chart below, you may want to look
at ALTR in Daily or weekly time frames to see the same pattern. ALTR has
been in a moving average Buy, on a weekly basis, since late 1998.
Back to our short term trading using 60-minute bars.
ALTR broke above a congestion area between 42 and 45 in early September.
The next week ALTR went back into a congestion area, but the Bulls stayed
in control as ALTR broke out of a 49-51 range and has now moved up to
another congestion range in the 52-55 area.
I am expecting another breakout here.
To be sure it is going through now, I would place Buy Stop order to Buy the
breakout or enter myself on Day Trading software hits the breakout price.
I would Buy ALTR 55 5/8 on a Buy Stop.
I would place my stop immediately at 52 5/8.
