I Trade Like I Drive

I trade like I drive.

On warm, sunny days I'll take out the garage dweller, and if there is a left lane and traffic is clear, that's where you'll find me.

When the weather suggests otherwise, I am in my faithful 4×4 pickup, riding conservatively in the rightmost lane on the best snow tires. Slow and steady, with a high probability I'll get to my destination.

There are many people who neither drive nor trade like I do. Going along slowly on the highway on the tail end of a snowstorm several years back, a car quite confidently passed me. A few minutes later, traffic slowed to a crawl. Just a half mile later, that car was upside down, still spinning around like a top. It didn't seem to me that driver accomplished what he wanted to, unless his goal was to grind some paint off the roof. He was in such a hurry to get to his destination, he didn't.  I keep lessons like that in mind when analyzing the market, looking for the next trade. Pick the appropriate strategy for the
conditions.

So how do I view the current market? Just since the mid-November timeframe, many well-known stocks, even big, normally lumbering ones, have made impressive gains:

Be Aerospace 36%
Ford 51%
PerkinElmer 48%
Walgreens 22%
United Technologies 20%
Saint Jude Medical 29%
Charles Schwab 28%
Rockwell Automation 29%

Are any of them, or the overall market, due for a pullback? We haven't had much hesitation so far this year. There's no rule that a stock must pull back, even after 51%, almost straight-up gains, so there's no easy answer to that question.

Further confusing things is the fact many of these stocks are rising on unspectacular earnings. For example, Rockwell's last three quarters sported earnings gains of 2%, 9%, and -1%. ROK's sales gains declined from 7% to 1%. Are traders expecting ROK will blow out this quarter's earnings?

Looking at the charts, it can be difficult to form an opinion as well. UTX has recently surpassed 2012 highs, marching straight upwards. Buying strong stocks breaking previous highs increases the odds of success. This looks like a ‘left lane' stock.

 

But if we widen the timeframe a bit, we see UTX is just reaching 2011 highs. Will it have enough strength to break through that resistance level? This is
not a higher probability trade, at least not before UTX completes a convincing breakthrough. It may very well turn back and head south. This chart says it is time to drive more conservatively, in the right lane, at least until traffic clears up.

I've been increasingly focusing on straddle option trades. They can work well when you have a rising market that you want to participate in, but hope to keep your head above water, and perhaps even profit strongly, if the stock takes a fast elevator down.

They have not been a favored trade with me because they are usually lower probability trades. But with the very low Implied Volatilities in the options
of many stocks, the right stock with the right track record, and trades implemented a certain way, straddles can turn into a high probability trades.

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, click here: www.markettamer.com/seasonal-forecaster

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2013 Stock & Options Training LLC

Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.

Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.

Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.

As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.

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