a topping tail.
Now to throw in the one key that most traders miss and costs them money. To truly keep your winning odds at 90% or better, you must also factor in the market. The below chart is of Corinthian Colleges, Inc. (NASDAQ:COCO) . You can see, a great bottoming tail formed based on all factors mentioned above. However, one factor would keep Chief Market Strategists away from this trade for now. While the stock had a great recovery, it still closed lower. That would not matter if the market for the trading day was flat or lower as well. However, the U.S. stock markets rallied 3-4% the day before. The fact that this still could not end the day higher tells us to give it a little time and then re-evaluate the trade.
Always look at the trading day in the markets and match it up to the stock chart. Too many traders see a pattern and ignore the macro action on the markets. If you want to be a complete trader, start with the micro view of the stock, then expand your view to the macro market. If all things align, a 90% success rate trade will be your reward.
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Most traders do not put all the pieces of the puzzle together when learning and using technical analysis. Let's talk about topping and bottoming tails. Simply put, a bottoming tail is a bullish signal and a topping tail is bearish. A bottoming tail MUST occur at the lows of a chart. This means that no point on the chart in recent history can be lower. Next, the tail must be substantial, not just a little thing barely seen by the eye. Additionally, the close of the candle must be in the upper 25% when measuring from the lows to the highs. If all these factors match up, you may have a bottoming tail. The same things apply for
As you all continue to learn the ITMS Methodology, I felt it was important to go over the Three Day Rule. This rule was developed to increase the success of InTheMoneyStocks members. It is something I use constantly and has saved me hundreds of thousands of Dollars.
ITMS Three Day Rule: Anytime news breaks, whether positive or negative, allow three days to pass prior to buying or shorting the stock.
Reasoning: After good or bad news, money will flow into the stock or out of the stock for three days due to margin calls and institutional involvement. Buying or shorting prior to three days is an easy way to lose money. Amateurs buy on the initial drop or the initial pop. Pros wait and re-evaluate after three trading days.
Example: A stock gets crushed on earnings. It gaps down 50%. The average investor thinks it is a steal of a deal and buys. The stock continues to sink for the next few days. It may fall another 10-25% or more before it reaches a bottom and bounces.
Why this happens more often then not: Hedge funds and institutions will sell millions of shares. This cannot be done in one day. In addition, margin calls will be issued. This can take days to be dealt with.
Buying a huge gap down or shorting a massive gap up is a fools trade with no more than 50/50 odds of success.
A recent example of this is Crocs, Inc. (NASDAQ:CROX). This stock reported a horrible quarter. It opened lower on the morning of the October 18th, 2011 at a price of $17.25. This was a gap down of 35%. While average traders may buy it, the ITMS Three Day Rule tells us not to. After three days, re-evaluate.
As the chart shows below, it went lower for three days following the initial gap. Today, it finally found some support on the chart. Amateur traders that bought on the initial gap lower would be down another 12% while intelligent ITMS member would now be re-evaluating the trade.
The ITMS Three Day Rule is something to always keep in mind. Naturally, when we see a drop like CROX we want to buy. Avoid it. The key is to only take trades where you have the advantage in a major way. Understanding margin selling and institutions through the ITMS Three Day Rule will help you profit for life!
Note: CROX is not a buy or short here. It is purely an example of the ITMS Three Day Rule saving investors and traders money.
For any skeptics questioning the validity of the Federal Reserve's dovishness, the latest inflation report provides solid evidence for why easy monetary policy is still needed. Not only has job growth in the U.S. slowed but producer prices fell 0.2 percent in the month of April.
http://www.fx360.com/?et_cid=21352810&et_rid=wallstreet1928@gmail.com
financials came under pressure in Asia after a surprise $2 billion derivatives trading loss for J.P. Morgan Chase & Co.JPM +0.25% , revealed after the U.S. close.
http://www.marketwatch.com/story/japan-stocks-rise-on-earnings-but-others-slip-2012-05-10
http://uk.reuters.com/article/2012/05/11/uk-jpmorgan-trading-idUKBRE8491I320120511
http://www.marketwatch.com/story/chinas-inflation-eases-in-april-2012-05-10
for the next few hours, investors will be holding their breath in anticipation of China’s latest economic reports. Last night’s larger than expected Chinese trade surplus sent most of the major currencies sharply higher despite concerns about the level of import and export growth. Their trade surplus nearly doubled in the month of April from $9.9 billion to $18.4 billion. However export and import growth slowed materially, raising widespread concerns about the growth in China. Tonight inflation, industrial production and retail sales numbers are scheduled for release.
