|Any time a large-cap stock drops about 30%, you can bet that it will end up on an analyst's or newsletter's value or bottom-fishing list of stocks that should be purchased. While in the case of certain stocks this can be a good buying opportunity, you still need to take a glance at the larger economic and/or stock market backdrop before rushing blindly into any kind of value play. Remember how violently stocks were falling from late 2007 through early 2009? Not many financial sector stocks were a good buy after their first 30% tumble from their early 2007 highs, and those who stayed with such ill-timed purchases might have ultimately lost 50 to 90% of their invested funds in such stocks, especially if they sold out near the bottom of the financial panic phase going into early 2009.|
The big idea here is this -- know which way the financial landscape winds are blowing before arbitrarily deciding that a 10%, 20%, or even 30% correction in the price of a quality stock is a true buying opportunity. Here's a look at the stock of a fairly big player in the Northeast US banking industry, Hudson City Bancorp (HCBK) (Figure 1).
|FIGURE 1: HCBK, DAILY. The concept of support and resistance (S/R) is perhaps the single most vital price dynamic you will see at work on any stock or commodity price chart. Strong buy or sell signals from well-developed trading systems that occur near these critical S/R zones can help identify powerful trading opportunities.|
|Graphic provided by: MetaStock.|
|Graphic provided by: Rahul Mohindar RMO from MetaStock 11.|
|Currently, we see a brand-new RMO (Rahul Mohindar) swing sell signal on HCBK's daily chart, and along with it, a weak RMO oscillator histogram (top of chart) and also a very weak medium-term money flow configuration, as depicted by the 34-period Chaikin money flow histogram at the bottom of the chart. So there's no big revelation here; HCBK is in a confirmed downtrend (lower swing highs and lower swing lows), has weak money flow, and bearish downward momentum. And the RMO swing trading system says it's a good time to take a walk on the short side of this stock.|
One interesting aspect of this trade setup is that the signal arrived just after the stock tested key support at $9.51 and then managed a minor intraday reversal to close at $9.69. Traders need to keep a close watch on that support line (blue dashed line), because if you get a daily close below it, the next major support level in this stock is at $7.46, which also happens to be the major March 2009 low not only for HCBK but for the entire broad market.
|Running a two- to three-bar trailing stop of the daily lows might be the simplest and most objective way to follow this short position, after an entry a few ticks below the $9.51 support level previously discussed. It usually pays to run a close stop and/or set a modest profit target on a short stock trade, mostly because of how quickly and violently a short squeeze can materialize in any given market.|
Spend some more research time on this setup yourself and see if you also agree with the basic trade setup assessment presented in this article.
|Title:||Writer, market consultant|
|Company:||Linear Trading Systems LLC|
|Jacksonville, FL 32217|
|Phone # for sales:||904-239-9564|
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