Monday, August 07, 2006

Vertical Spikes and Basing

We had placed NIHD short alert at 50 in our weekend newsletter last night along with the following chart indicating to enter a short position on the break of 50 support.

Today, NIHD opened green and proceeded to rally somewhat before reversing hard on heavy volume. She came rushing down from over 51 to hit our alert at 50 and confirm the trade at 49.88. However, this was not the easiest trade to take since, as we have written here numerous times, chasing vertical moves is not a great trading strategy. Let's take a look at the actual trade:

Here comes the vertical move with very heavy volume.

Vertical spikes are rarely worth chasing. If the volume is heavy and the pivot point on the daily very attractive, then watch for a base right above (or below if short) the pivot point. This way you do not have to chase, and you are supplied with a nice entry with a risk defined natural stop.

NIHD is a perfect example of this as she bases right under the pivot point of 50. From there you could easily put on a position short at 49.8 with a 20-25 cent stop (right above 50).

As you see she based there only for a little while before dropping exactly one point for a nice and quick 1 point target daytrade.

At which time you bow your head, say thank you, and take at least a good portion of the daytrade profit. Of course you could argue -- well I chased it short at 50, got in at a better entry than you, and profited just the same, so what is the advantage of letting it base? Remember, trading is a number's game and we have too often seen vertical spikes quickly reverse for a large loss, to ever be interested in chasing a trade. It might work for you once in a while, but in the long run, it pays off to be patient, and wait for the intraday base to give you a defined stop. Wait for the set-up = waiting for the trade to come to you.