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There are scads of potential swing-trade setups approaching. I say “potential” because they’re still at least a day or two away from being mature, clean setups (i.e. high-probability). I call these swing trades because I’m looking at daily bars (as opposed to a setup on 5-30 minute bars, which I’d define as a day trade).

The swing-trade definition of “a trade which lasts days to weeks” is a little ambiguous to me because it allows you to mislead yourself into repeatedly switching time frames when you’re desperately seeking to be right. Been there, done that. It never pays. Defining your time frame in terms of the bars you use forces a little more discipline.

We could look at literally hundreds of individual stock charts, all displaying the same basic pattern but with varying amplitudes. In a case like this, it’s easier to look at the overall market, which is itself setting up.

The Nasdaq-100 (NDX) peaked at 1761 and change on 1/11/06. The 1/12 high was lower, but only by a point. Friday 1/13 saw a second lower high at around 1750.

No question that the “Dave Landry Big Blue Arrow” is pointing up after the recent breakout. So would this pullback give a trade entry point above Friday’s 1750 high? Not for me.

The resumption of a trend after a minor two-bar pullback isn’t a high-enough probability trade for me. I like at least three lower highs, and ideally, a dummy spot to trade off of (what else!). That’s just me. You do it your way. I’m not saying you shouldn’t go long Tuesday morning. I’m just saying I won’t.

However, if the next 1-2 trading days see lower highs on fizzling volume, I’ll be all over that setup like a duck on a june bug.

For some individual examples of this same setup, check out BRCM, CSCO, GOOG, SNDK. There are many many more. I’d put all the charts up here, but I’m still getting this site going, and I don’t have an easy way yet to paste properly-formatted charts into the blog. Right now it’s still open Photoshop and edit, resize, compress, then upload and link. Ugh.

Opportunity is missed by most people because it is dressed in overalls and looks like work.
Thomas A. Edison

Just a little re-affirmation regarding getting out of a trade that’s not behaving. Live to fight another day, as they say. Had I panicked and held onto STAA yesterday, I would have been down $700 just after the open this morning, less than 24 hours after I initiated the trade. Instead I lost about $15.

Now, I had no way of knowing STAA would fall further. It could have doubled. Point is, I don’t care. If I had held on and ended up with a gain, it would have been accidental. Not repeatable outside of pure chance. That’s what gambling is. And over the long haul, gambling only has one outcome.

Took a trade today in Staar Surgical (STAA). I’m posting this one because it’s a great example of what I think is the most important part of successful trading: protecting your money when you’re wrong.

Sitting there 30% down in a stock and eating your guts out saying, “if I can only get back to even, I’m outta there” is no different than sitting at a slot machine saying the same thing. You’ve lost the mental battle already. If you get back to even, you’ll be feeling smug and thinking now you can get above even, so you keep throwing your money at the stock (or slot machine) until it finally takes it away from you for good.

Small losses. The magic of successful trading. Not being right all the time. That would make you clairvoyant, in which case one Powerball ticket would do the trick. Small losses. Small losses. Small losses. Then the occasional big gain. Sounds upside-down, but that’s how it works.

Here’s my small loss for today. I’ve cut down to the first hour or so of the chart so you can see the setup I was looking at:

A nice gap up and pullback on decreasing volume that fit my trading criteria nicely. I got in at 7.82 on the break of the 10:10 EST bar. Market holding up pretty well, plenty of upside potential on this chart, tight stop (about 7.73, bottom of 10:10 bar). Love it, baby.

Fast forward to a bit later:

I got out at 7.83 for a wash. Had I been paying closer attention, I may have used the Dave Landry technique and closed half my position at “1R,” which in this case was hit for a moment on the 11:00 bar at 7.91. Had I done that, I’d have closed the trade with a very small gain after commissions… which is about as nice as you can ask for when you’re stopped out.

Why the sale here? It hadn’t fallen to my original stop, but it hadn’t taken off, either. Yet another lesson I’ve learned is the difference between being proven wrong and the failure to be proven right.

If a trade doesn’t follow through per your expectations within a certain amount of time, even if it hasn’t hit your initial stop, get out. Why? When you take a trade you (hopefully) have a definite idea of how soon you expect the stock to move. When it fails to prove you right, if you hang on you’ve crossed into hoping, and hoping is never successful in the long term.

I call this my TIME STOP. Exactly how and where to do this is very individualized. I’m very severe on my trades– I try to give them only 3-5 bars in the time frame I’m trading to make Daddy proud. On 5-minute bars, that’s as little as 15 minutes to get off their ass and show me something. Plus or minus. I step out of some eventual winners this way, but I sidestep a lot of oncoming trains, too. And missing trains that are about to run you over is always more important than trying not to let one get away. That’s just my opinion. You do it your way.

UPSHOT: This thing had failed to follow through, the volume stayed weak, that’s all I needed to know. If it goes to the moon later, fine. I’ll wait for the one that behaves well, and limit my risk in the meantime.

Here’s the chart for the entire day:

Had I hung on and hoped, I’d have ended the day down nearly $300 on 1000 shares. And be rolling around sleeplessly tonight worrying, rather than sitting up sleeplessly, typing. Trust me, this is much better. I’ll sleep like a log when I finish this.

Michael Eisner is the latest CEO/celebrity zillionaire to get his own talk show. Donny Deutsch must be getting pretty good ratings. Anyway, this morning Mark Haines asked Eisner what he felt would make him a good host. Eisner replied, “I have a very sensitive antenna for obfuscation.” I may have to cop that phrase. I’ve always just called it my BS meter.

The S&P 500 cleared the 1275 resistance area today. That’s big news. Gives you a very nice trade setup on the follow-through or the failure. Volume is puny, but that’s OK. The breakout will show up on everyone’s stock screens tonight, and no doubt the faces on TV will be yakking about it all weekend. Monday should be a big tug-of-war between

• The buyers who reflexively react to the breakout news, especially those who live in fear of being left out of the Big Move.
• The sellers who only see the “overbought” level of their oscillators, not realizing the oscillators’ predictive value just went to near zero.
• The (short) sellers whose greed causes them to try and pick a top, without waiting for confirmation.
• The professionals who make a living spanking all of the above groups, and will happily take either side.

How do you tell which side will win the tug-of-war, so you can be sure you’re on their side? If you’re greedy and scared of missing something, reach in your pocket and get a quarter. Now flip it. Heads, go long. Tails, go short. How’s that? It’s as definite a predictor as any at this point.

If you don’t fit into the above groups, you may have learned the very painful lesson that hanging onto the money you have comes before trying to make more. If you’re patient enough to wait a short while, just sit back and watch the action unfold. A big volume day on Monday would be a good vector pointing the direction to trade, and you’ve got a nice tight stop either way.

The cat is out of the bag. Wal-Mart’s holiday sales numbers are coming in soft, and the press is running around like a chicken with its head cut off, frantically attaching reasons to the weak numbers, post-facto.

How did a simple Loosiana boy know in early December that Wal-Mart would have a disappointing holiday season when all the seven-digit analysts were predicting blowout sales?

As much as I’d like to claim some special insight or magical intuition, the truth is much simpler– I’ve just learned over the years to believe what I observe over what I’m told.

People say believe half of what you see,
Son, and none of what you hear…
I Heard It Through The Grapevine (Marvin Gaye)

Believing what you are told when it contradicts what you know to be true is a form of denial, the Continue reading this post »