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"Old" observations remembered.

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I talk a lot about traders keeping a logbook of their observations. These observations can keep traders "on track" as to the dynamics taking place in the market. Are they still true today? At the OptionInvestor Workshop, I talked about "boring" stocks and how "big money" looked to be rotating into the cyclical stocks. Is today's earnings from Alcoa (AA) a "surprise"? I think "big money" new of Alcoa's future and were betting on it back on November 28th when I wrote an update on AA and how "boring stocks" like the cyclicals might be a place for bullish traders to focus. At that time, there was not a lot of "good news" in the cyclicals, but they were moving higher. Today, AA has given the cyclicals some "good news" and it will be interesting to see if "boring" stocks continue to mount gains.

Alcoa Chart - last seven months

We didn't think, "Alcoa could wait" back on November 28th when the stock closed at $27.81. Today the stock trades as high as $35.75. While shares of AA may not seem "exciting" it has been a place for bullish traders (options or stock) to make money. Most traders trade to make money, some trade for "excitement". I don't mind a little excitement during the day, but if "excitement" means losses, I want nothing to do with it.

Biotechnology Index Chart - last eleven months.

Last Wednesday it was our observation that the BTK.X was breaking a critical level of upward support. The Fed rate cut stemmed the bleeding for about 3-hours, but when Thursday's trading began the group reverted back to a downward move. Level (A) (thick pink) was our bearish trader's first target. Level (B) was our second target and level (C) our third target is approaching. On Friday we mentioned that traders should be moving their stops down to level (B) as a way to manage their trading for this index and stocks that belong to this group. Level (B) resides at 535 and level (C) is at 470. This index has been "exciting" and looks "profitable" depending on what side of the trade you're on. Traders that understand where the risk lies (for bulls or bears) at current levels may want to move their stops down even further than level (B). What would you be tempted to do if this index turns around and trades near 600 in the coming weeks? If you didn't get some of the "above action", it's never too late to set up a plan.

Take from the above what you will.

The above commentary is not to say "see we were right". It is intended to try and get traders to start a logbook that will hold your observations. Once you begin writing down your observations, you can then review them on a weekly basis and "test" yourself to see if you're keeping yourself on the right side of a trade. Are you truly "in touch" with the messages of the markets?"

Jeff Bailey
Staff Analyst

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