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Insiders Club Trading Course Part 3 Bookmark

Pick Your Style

Over the years, I’ve noticed that some people are very good at trading bounces. Some are very good at shorting gaps. Some are good at finding break outs. There are quite a few ways to “trade” a market, but it’s very hard to focus on more than

Pick Your Style

Over the years, I’ve noticed that some people are very good at trading bounces. Some are very good at shorting gaps. Some are good at finding break outs. There are quite a few ways to “trade” a market, but it’s very hard to focus on more than one, two at the very most. I think it is important that as you learn to trade, you also learn to exploit what you’re best at. I personally feel I’m a good breakout finder and that’s what I specialize in. Bryce is a dip buyer, he almost exclusively buys pullbacks. Gary fades gap opens, whether long or short. I think it important that you examine the various ways to trade and gravitate to the one you can identify the most, and seem most successful with.

I’ll start with breakouts, because that’s what we do here the most at IY.

In “normal” times, a stock goes higher when demand for it, outstrips the supply at a particular price. Remember folks, in life everything has a price. You might not sell your car to some guy that offers you 20 grand for it. But you’d rush to the bank with his check if it was for 100 grand. The car had a “price” and if the price is right, you’d sell it.

Same thing with stocks, “sorta”. I throw that caveat in there because there’s a lot more now days that propels stocks higher than simple supply and demand. The market has become a bit twisted to say the least with rabid Central bankers willing to do anything at all costs to move things higher. But, for the sake of you all learning what this is all about, we’ll start with the simple concept of supply and demand.

Let’s say a stock is trading at 40.00 per share. What that means is that at the current supply of stock in the marketplace, there has been a balance struck between those that think it might go higher and those that think it might go lower. So it’s sitting today at 40. Now, suppose that very same company comes out and says they secured new contracts with Google to implement some new technology and their revenue will triple. Immediately demand for those shares will increase and the people that already own it will decide if it is going to be “taken away from them”. How? Simple. They will hold it until they feel the price is right and then sell it.

Let’s suppose the price jumps to 41.00 that morning. If enough people sell it at 41 to the people that think it’s going higher, it will stop moving higher. But if enough people aren’t willing to sell at 41, the price will rise. Now let’s say it’s 42. This goes on and on until there’s a new balance between those who wish to have it because they think it’s going higher and those that think the run is over and are willing to sell it at that new price.

That’s pretty much all this is about folks. Perception of what that stock is going to be worth in the future combined with the availability of that stock on the open market.

Now.. for a stock to move higher, it generally does so in spurts and then it stops moving up and wiggles sideways and often lower to some extent. Where that stock ran out of upwards momentum has now become what we call a RESISTANCE LEVEL. I’ll use the following chart to show you what I’m talking about.

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I think you got the idea in that video, looking at the chart of GLD how it’s very common for a stock to form a resistance line. Now some of them will form in a matter of a few days, sometimes resistance lines are in place for YEARS. Many is the stock that might have set say a “high” at 50 dollars back in 06, and it has ran back to that level several times since, only to be pushed back down. I’ll show you that in this next video, on a stock we suggested we liked in the Insiders Club. STEC .

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Now I’d like to show you a Chart of NVLS. Why? Well as we were looking for something to “play”, remember what we like to do 1) we find where the money is going, and recently it had been going to technology. 2) is the market flat to moving up? Yes. 3) find a chart that has the possibility of making a move with the sector, or market. So.. let’s look at NVLS

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Okay, you saw the set up.. You saw why we were looking at it, and you saw the level we were comfy at getting in at. Now I want to expand on that particular stock again, so please watch this video…

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Bingo, as they might say. As you can see, a stock moving higher is ALWAYS a situation of an overhead resistance being overtaken, and the stock sets a new equilibrium a bit higher. Then where that move runs out of gas becomes the overhead resistance and if that gets exceeded, chances are good it’s going to have a nice run until that momentum dies out. The “best” part of this is that every stock puts in these overhead resistances. Not one stock has ever “just gone up” and never pulled back. Ever. So every stock creates upper resistance levels at some point. Take a look at this screen shot that I took where I placed the arrows to show you how many times an upper resistance can be challenged.

In that example, MS ran out of upward momentum 5 times, before finally busting through. Then if you look really close at the last part of that chart what do you see? It busted up and over that line, ran about a dollar or so, and then pulled back. BUT this is important. That Upper resistance level had now become a SUPPORT level. The stock fell right back to that line I drew, and tested it, and then ran right back up. That is a very common pattern.

I could pretty much wrap up this whole tutorial right there, because what lesson three has been about is how we trade the market on a daily basis. We want the components to fit. We want a flat to rising market, we want to locate where the money is going in the market, and we want to find a chart that suggests a breakout is possible in that stock. If we can line up all three of those items, the chances now become better than 70% that you’re going to make a good trade.

Granted, nothing is ever written in stone concerning the market. Ever folks.

Now, just as stocks create upper resistance levels, they also create “support levels”. This is merely where a stock stops falling, and bounces a bit. Now, the next time it falls, if it halts its fall where it did the first time, that’s a support level. Let’s look at a simple “double bottom”

See where WFT fell down to that 13 level and then bounced…it ran to 15.50 and pulled back again. But notice that when it hit that 13 level, it bounced right back up. “Support” had been established. Now some people are quite happy trying to buy stocks when they hit a support level like this, it’s a classic “buy the dip” scene. I think the only reason I don’t play the support game, or the buy the dip game is that I have always been able to spot the overhead resistance levels “better”. In any event, by the way, take a look at the right hand side of that chart. Notice the resistance line it created at the 23 level? Well sure enough we did and we put it in the Insiders Club. We suggested that we were going to buy some if it could get up and over 23.05. Then look at that last day on the chart. BOOM. A classic breakout jump of almost a dollar.

So, when you hear terms like double top, triple top, double bottom, triple bottom, all you are hearing is support and resistance, and how many times each has been attempted. One Note however… often as a stock runs up and creates a “top” and pulls back the next run up to the resistance line is a crap shoot as to whether it gets through or not. Now let’s say it can’t, you’ve created a “double top” . Then in two weeks it runs up again, that would be your “triple top”. Because of the up and down oscillations, each time the shorts are successful in driving it back down, the fact is that if it gets through on the 3rd or 4th attempt, it often has a lot of power behind it and that first day can really jump.

Okay, so you see how we try and connect the dots, how we try and align the market with a stock and a good chart. You’ve seen how we try and get our heads correct by not letting emotions get in the way. You’ve seen how we recognize what we feel is a good chart, etc.

When we get all our ducks in a row, we will buy that stock when it exceeds the resistance line. The first move doesn’t always work. Sometimes breakouts fail. But.. we have to give it a shot. What we do however is simply this.. if the breakout fails, we can 1) sell out “flat,” meaning we sell out where we bought it. For instance let’s say XYZ has a double top resistance line at 50.00. I would say in the Insiders Club.. “Hey guys, XYZ has been moving well, and the whole sector looks good. With the futures up this morning, I’m thinking that if XYZ gets past 50.05 I’m going in. “Now…let’s say XYZ does exceed 50.05. We buy it and we take 800 shares at 50.07. Now it runs to 50.30… and starts rolling over. A true “daytrader” would sell right back out if it fell to where he bought it. (Or he might just sell it at 50.25 and pocket the nickel)

In any event you can sell it out flat, or place a stop on it. The choice is yours but it’s not an easy one. Let’s suppose you decide to put a stop on it at the previous day’s low of 49.30. Well the breakout failed, the day is going to hell, the DOW is getting ready to go red…and “boom” you get stopped out at 49.30. You just lost 75 cents. Bummer. If you had sold flat, you’d be out, well, flat. No real loss except for commissions.

The problem is “how do you know when to sell flat and when to give it another shot? The fact is, you don’t. But what we do is this…we look at the day. If the day is still strong, the market is up across the board, we are more inclined to put a stop on the thing, and then see if it challenges the breakout again. If the day is getting ugly, we’ll usually just sell flat, or for the small loss, say 20 cents or so and look to try again, either later in the day, or the next time it challenges the upper resistance.


Are there any Sure things?

No there isn’t. But there are a few things that help weigh in your favor. For instance 4 times a year we get “earnings season”. Usually a stock will move up into its earnings reporting dates, starting about a week ahead of the release. Sometimes they start well ahead of that. So, buying a well liked company like an Apple Computer or what have you a week or two ahead of earnings is a pretty good trade idea.

Splits come to mind. Let me explain.

A good company declares a split when it thinks that its stock price has gotten to a level that puts it out of the grasp of most buyers. The most common type is a 2-for-1 split, and that simply means that if you own 100 shares of XYZ for 50 dollars and XYZ announces a split, you will then own 200 shares at 25. The value stays the same, but what interests us as traders is that when a company announces one, it often boosts the price a lot.

Now…let’s chat about this for a moment. Back in the crazy days of 2000 splits were so powerful, there were “split pagers” you could buy and the second a company announced a spit, it would ring in your pocket and say something like “XYZ 2 for 1 split” Then people would rush to call their brokers and buy it because it was common in those days for the stock to gain 20 dollars on the announcement.

Well, we don’t get that kind of reaction any longer, but that’s not to say split plays are dead. Yes you often can get a little chunk on the announcement of a split, but the better play is this… About a week before the stock is actually going to “do” the split, it often starts moving up. Then the best idea is to simply “step off” the day ahead of the split.

Now of course everything is subject to change. Some stocks just keep going up from the day the split is announced, it all has to do with how far away the actual split is. Some are announced and the execution isn’t for 8 months. Some are announced and executed in 7 weeks. The shorter the time period between the announcement and the execution the greater the chance the stock might just wiggle sideways and up from the day of the announcement.

For you longer term investors, what we’ve found is that buying the stock after it splits, is often a very good longer term hold. For instance let’s say XYZ is 100 dollars and they do a 2 for 1. When the date arrives, XYZ will then open at 50 dollars. Often right after it opens and for a day or so they dip a bit, but say a week later, they usually right themselves and start inching higher. Over the years, and yes I’m talking long long term years, what we see is that “most” good companies will get back to their pre split price between 18 and 24 months from the execution of the split.

When you look at a company like MSFT, or INTC or MMM, or what have you, some of them have split and run up, split and run up, split and run up 15 times! So, it’s still one of the most powerful forces in the market.

Other than earnings season, and splits.. I don’t know that there’s anything really “solid” you can call some form of sure bet. Sorry, after doing this for 20 years, I just don’t see anything rock solid. Doing fast fading of gaps (both long and short) is consistent, but if you have a job, it’s impossible to do…you need to be there in real time.


Go to Part 2 | Go to Part 4

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