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KELTNER CHANNELS


Entergy Looks Like A Major Slide Ahead

03/18/11 09:10:16 AM
by Donald W. Pendergast, Jr.

Trying to catch a falling knife isn't usually a good idea in the kitchen, nor is it a suggested stock market strategy -- most of the time.

Security:   ETR
Position:   N/A

Unlike a mishandled piece of flatware, shares of ETR aren't likely to actually hit the floor; however, the daily chart of ETR still is hinting that prices are more likely to fall another $5 to $6 per share (to a key support level) than they are to quickly turn around and recover some of their recent losses. See Figure 1.

The chart has a pair of Keltner channels overlaid -- the inner ones are set at 4.2 standard deviations (SDs) away from a 45-period exponential moving average (EMA) and the outer bands are set at 7.5 SDs away from the same EMA. It's not too often that shares of ETR actually approach the lower band, but when they do and when the band actually starts to turn lower in sympathy, you sometimes get a great deal more bearish follow-through, very much like what happened in July 2002, when the stock (along with most others) was in the midst of a panic-driven freefall.

Will this time play out differently? Absolutely no one knows, but even if you are a "buy-the-dips" or "dollar cost average" kind of long-term investor, it would seem to be a prudent thing to let the stock confirm that the worst of the selling is over before starting up your periodic purchases of this particular issue. For example, if the stock keeps dropping for a few more sessions, see what the price action looks like down near $58 to $61; are you seeing a wide-range bullish reversal bar on heavy volume? Or has the $59 level been broken and then the stock decides to shed another $5 across a couple of panic washout days?

FIGURE 1: ETR, DAILY. This rout in the nuclear energy-related issues is getting ugly; however, the general area between $59 and $61 might be one place to expect any kind of tradable countertrend bounce.
Graphic provided by: MetaStock.
Graphic provided by: WB Keltner Channels from Profit Trader for MetaSto.
 
Scale traders could take a different route, one also based on the $59 to $60 holding as meaningful support. For example, say you buy 10 shares at $65, 20 shares at $63, 30 shares at $61, and 50 shares at $59 (increasing the size of your purchases as price descends toward perceived support), which gives you a total of 110 shares of ETR at an average cost of $60.82 per share. If ETR can bounce off of support near $59 and manage a crawl back to $62, you could sell the whole shebang for almost $130 in gains (before commissions, that is; always use a low-cost broker like Interactive Brokers if implementing a scale strategy like this). And once you stop the buying at $59, maybe you decide that all you're willing to risk is $0.50 or $0.75 per share on the entire position.

So, if ETR decides not to cooperate with your oh-so-clever scale strategy, you at least have an objective "I don't want to play anymore" exit point. And with most of your capital still intact, you can start to search for other low-risk, heavy-duty chart support areas in other stocks, scoping out similarly attractive scale-in setups.

Picking bottoms in sharply falling stocks is very dangerous, but if you have a track record of spotting accurate support zones in the stocks you regularly trade, scale-in strategies can prove to be very profitable and a whole lot of fun to trade, especially so near major market bottoms like the ones we saw in March 2009 and July 2002.

There's always a way to play the market, but sometimes you just need to think outside of the box.



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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