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Trading A Mixed Bag

08/28/12 09:23:30 AM
by Billy Williams

This past week's trading is a mixed bag of results, but there are still some silver linings for profitable trades if you know where to look.

Security:   SPX, ADSK, HMSY, WPI, CRM
Position:   Hold

The market had a mixed bag of results for stocks as good economic news appeared promising but didn't translate into meaningful price action. Durable-goods orders, an economic indicator pertaining to the sales of long-lasting items like machinery, were reported as higher but couldn't bait either bulls or bears to take control of a lackluster market.

With summer ending soon, the seasonal pattern for the market would suggest that one side will take control at some point as traders return to the floor after summer vacation to find investors neutral in an apparent holding pattern. See Figure 1.

FIGURE 1: SPX. The SPX continues the slow crawl higher, but there is no volume behind the move. Price pulls back slightly so if it does trade higher in rising volume, then the bulls are back in town and the bias returns to the long side of the market.
Graphic provided by:
On the heels of economic news, earnings came out for several stocks with many announcing less than stellar results for second-quarter 2012. (CRM) announced earnings up 24% and sales revenue up an impressive 34%, but investors were mostly uninterested. Worse, the company announced third-quarter estimates as lower for the year, which left Wall Street unforgiving and unmerciful as the stock sold off and plunged lower at the open.

On a happier note, the stock fought back like a force of nature and ended higher for the day, past the previous day's close and within 20 points of its all-time price high.

FIGURE 2: ADSK. Hard day for ADSK as shares tumbled hard. Look for a bounce back, then short aggressively unless the market turns. If so, step aside and switch to the upside.
Graphic provided by:
AutoDesk (ADSK) jumped out the window at the open by almost 20% after reporting the weakest quarter of the last 10 (Figure 2). And as the day went on, a nightmare for the stock's long positions continued as the stock sold off more and more, ending up at just under $27 for the day.

After-hours trading showed that the stock bounced up to around $30 which, in the current context of the market, would suggest looking for a short as the stock bounced back and look for it to resume its descent.

HMS Holdings (HMSY) fell almost 10% before powering its way back up to close just under its open (Figure 3). Previously, the stock had formed a classic cup & handle pattern and triggered a buy point at $34.73 before rolling over and taken apart by the bears.

There was no news-related event that resulted in weakness spilling over and into the stock's price action, but this stands as a good example of why stops are important, since no one can predict what will happen once you have a position in a stock. Price is gliding along the 50-day moving average and, if strength enters the market, might present an opportunity for a second entry.

FIGURE 3: HMSY. HMSY is still trading higher but recently has had a pullback to the 50-day simple moving average. Despite the bearish price gap, the stock powered back to gain a lot of lost ground and could be a strong candidate for a long position of the momentum returns to the bulls.
Graphic provided by:
Watson Pharmaceuticals (WPI) was the big newsmaker for the day as it powered up to a new all-time high of $83.83 fueled by higher volume and a potential runaway gap in its price action. In the current market type, you might be served best by waiting for the market to turn bullish as it is still neutral, offering no momentum to the upside. Still, this stock is a potential stock leader since it has been trading upward despite the downward pressure in the market.

August is ending without offering the benefit of a clear trend and only the promise of more mind-numbing sideways price action. The key lesson to keep in mind is not to let the summer doldrums of 2012 cause you to be restless and take on unnecessary risks. If you trade, trade small with shorter stop-loss points and take quicker, smaller profits till the market tells you otherwise.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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