Yesterday I got an e-mail from a subscriber and a fellow trader I have met twice at the Option Investor Expos. He asked a very good question as it relates to my line of thinking for adding shares of JDS Uniphase (NASDAQ:JDSU) as a long position yesterday. Here's what the point/figure chart looked like and still looks like. Try using some of these techniques and perhaps thought processes in other stocks you look to trade. While it is important to see if this trade works out also notice how position side was used to help reduce risk to our account on PremierMarkets.com
JDS Uniphase Chart - $0.50 and $1 box
Yesterday there was "good news" in the technology sector and it looked like the action taking place in shares of Cisco Systems (NASDAQ:CSCO) could drive technology stocks higher. PremierMarkets.com had no exposure to technology stocks so we went looking for a candidate. With bullish percent indicators at high levels I wanted exposure, but was not willing to chase gaps. I felt that shares of JDSU had upside to $27 so we looked to enter the stock near the $23 level and would follow with a firm stop at $21.75. Since JDSU's point/figure chart was currently on a sell signal (given by O at $18.50 exceeding previous O) I only suggested that traders look long the stock with 1/2 position. If a trader normally traded $5,000 in a long position, then they should have looked to reduce risk for their account with a $2,500 investment. On thing I liked bullish about the chart was the three upward trends used from a technique called channeling versus two downward trends. I felt my target of $27 would allow me to exit the trade just below downward trend. Again... I was looking for exposure to technology in a group I felt would have an upside move for a day or two. We got one day out of the trade, but today is a different day. Regardless, our stop remains at $21.75. We were risking $1.25 per share to potentially make $4 and I felt that was favorable risk reward considering market events at the time.
Current market conditions
Watch the 10-year YIELD. It is sitting right on our "waterline" at 5.20%. A level below that could bring in more aggressive sellers and put further pressure on stocks.
A lot of major indexes are trading just on top of their 50-period MAs on their 60-minute charts. This 50-period MA seems to be a place where stocks get a bid. If these MAs are broken to the downside, they can become actionable points for traders to start taking some more aggressive bearish trade action (shorting and buying puts). Don't overdo it and ease into positions. Once you start having some success to the downside, then continue to play that trend as long as it lasts.
I don't expect a prolonged decline and perhaps this pullback is the one I've been waiting for to get aggressive with for buying on a pullback. Our current option strategy is to begin buying some select stocks and extending our option expiration. I'd look to do the same. Stay tuned as we will begin providing a candidate list in our commentary.
So far today, we have not been stopped out of any long positions and have only added to our QQQ puts. I like the way our account is acting relative to the markets and think we're on the right track. Time will tell and we'll keep you updated in the hot list on PremierMarkets.com.