First Energy's Momentum-Fueled Keltner Clash

05/13/11 07:45:39 AM

by Donald W. Pendergast, Jr.

When a surging stock hits an outer Keltner channel for only the third time in 10 years, momentum traders will take notice.

Security: FE
Position: Buy

By now, you may have begun to realize that the business of making market predictions is a risky line of work, one likely to leave copious quantities of egg on the faces of market sages and wizards. Most pro traders would appear to be in agreement that buying/selling breakouts and/or buying pullbacks in the direction of a strong trend is the preferred way to interact with the markets -- most of the time. Here's a look at a powerfully trending stock that was located with the Deel momentum filter exploration in MetaStock 11. See Figure 1.

FIGURE 1: FE, DAILY. As scary as it may seem at first, sometimes it really is safer to buy a new breakout in a strongly trending stock than it is to buy when prices have fallen dramatically. Generally speaking, the trend is a trader's best friend.

Graphic provided by: MetaStock.

Graphic provided by: WB Keltner Channels from Profit Trader for MetaSto.

Shares of First Energy (FE) are currently in high gear, having been in a steadily rising mode for the past six weeks -- which is when the stock completed a major daily cycle low. After a quick retest of support in mid-April, the stock proceeded to mount a significant rally, one that has actually caused it to come into contact with the extreme upper Keltner channel for the first time in a very long time, and only for the third time in the past 11 years. While no one knows if FE has enough steam to keep on going much higher before a pullback or correction occurs, the fact remains that the rarity of an outer Keltner band clash in this particular stock means that we need to give it every benefit of the doubt, simply attempting to ride the trend for as long as possible.

Long-term money flow (as depicted by the 100-period Chaikin money flow indicator [CMF][100]) is exceptionally strong and appears to be very supportive of possible further gains in the stock. There's even been a minor breakout above the last new high set a few days ago, which is yet another bullish sign that the stock is firing on all cylinders.

Currently, the potential rates of return offered by June at-the-money covered calls in FE are rather paltry, not to also mention that the options have a fairly wide bid-ask spread. So forget going the covered-call route for now and simply seek to tap into FE's phenomenal strength by applying your own well-tested trading system or methodology to the stock, perhaps using a 15- to 30-minute trading time frame. If you don't yet have a trading system, why not take some time and work with the huge variety of system development tools in TradeStation and MetaStock and see if you can at least come up with a rational trading concept, one able to be programmed into either platform. Once built and operational, first stress-test and then back- and forward-test the system thoroughly to make sure it's going to be profitable in the real world of trading.

When you finally do have your winning system built (one that will hopefully price consistently winning results over a variety of large-cap stocks), you can always use the Deel momentum filter exploration output to find the strongest relative strength stocks to run the system on, in this case, from the long side only. Try it -- you may really come up with a ton of new trading ideas if you do.

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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First Energy's Momentum-Fueled Keltner Clash

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