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.
Channel Breakouts are one of the most respected methods of trading. Traders
will have different trigger strategies.
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.
The last couple of days we looked at stocks for possible break ups. Today,
let’s look at a possible break down in a stock.
Let's look at CMG Information Services Inc., (NASDAQ: CMGI).
Over the past couple of weeks, CMGI has been channeling, and breaking lower.
Those of you that are familiar with Head and Shoulder formations, can also
see a right should during the late August and early September time frame.
CMGI then tried to rally, and formed a head during the September 10 and 13
time frame. The right shoulder is now being formed during the past week of
trading. A break of the neckline drawn across the lows of late August and
the current low, would be negative.
The channel over the last month will be our method used here, but I also
wanted point out how many times other indicators will confirm a signal.
The recent channel between 79 � and 84 has formed over the past week.
On a break below this Support, I would be a seller in CMGI again.
To play this strategy, I will wait for confirmation and not enter until a
clear break of the channel occurs.
To be sure that CMGI is going through the support area now, I would place
Sell Stop order to Sell the breakout or enter it myself on Day Trading
software hits the breakout price.
I would Sell Short CMGI on a trade at 79 � or lower on a Sell Stop
at 79 �.
As we saw in the past two days Market Call, do not anticipate. Wait for the
breakdown to occur.
If the stock trades at 79 � and I enter a Short , I would place my
stop immediately at 82 �.
