Saturday, December 04, 2010

Usual suspects, support, breakout, and other trading talk

We like focusing on a small number of stocks in a few sectors.  We have basically been trading the same stocks for over a decade -- this means that we know the sectors and stocks very well.  This helps us trade them well on support and resistance.      Let's look at some numbers.    We've done two set of big trades in the last 3 weeks.  The first one was from our November 16 newsletter which was a list of support alerts.  This means we were buying the blood into support.

From our support long alerts that TRIGGERED ( of course not counting ones that never hit our alerts like APA 104 or BTU 55 which would have been oh-so-sweet) from our newsletter for November 16:

SPY is up 4.6% from the bottom of that day on November 16 to today.

Our support longs that triggered are up the following amounts:

WLT 23 %
SLV 17%
XME 14%
X 11%
CNQ 10%
GDX 8%
WFC 7%
RIG 7%
GLD 6%
MOS 6%
DE 5%
MON 4.65%
DO -1%

Versus SPY up 4.6% from the bottom tick of November 16

The second big trade was not support but breakout; it came in late November in which we told our subscribers that we were buying in anticipation of alerts included in the newsletter.   We bought significantly below the following spots: CLF 72, UPL 49, OXY 89, BTU 60, APA 111, and UPS 70  because we had conviction that they would all break.   One by one every single one broke out.

As we've written repeatedly over the last 4 years in our newsletters and in this blog -- the safest trade is not the breakout but the trade to a magnet area known as the target.    We have never had a target trade not reach its target.   Sometimes it takes longer than we think (SMH 29 took the longest, 3 months) but they do reach their targets.    What happens after the target is reached (i.e. now a break-out) is more complicated.   Breakouts often fail, support often falters, but primary targets, in our decade of trading, are always reached.   

The big caveat of course is knowing what is a viable target.    Basically, the more clear the target the better.  Crowded trades are awful if you only get in when they trigger -- they often play games and stop people out or are sold.  But the numbers are hit.   Let's say stock HCPG is trading at 48 with a very clear breakout level at 50.  Everyone on your stream at Stocktwits is talking about the big juicy HCPG breakout at 50 and it's obviously a very crowded trade.  If it's a benign tape, and it's a great breakout level in that it has based on the daily and is not extended, and it's a stock you know well (and trust, we don't do this on small-caps for example or any financial save GS), then do not wait for 50 to come,  buy it at 48 with conviction that 50 will at least be hit. Once this happens we have 2 points cushion for any possible choppiness/games or failure.   The chances of the stock going to the target area are MUCH higher than having the chances of the breakout actually working.  

All that being said, it sounds easy but it's not -- many traders see target trades that simply are not there, or are too weak a magnet.  After our target trade posts we always get questions like "I'm thinking of buying this stock as it has a target at so and so."  We look up the stock and see a higher resistance level but no clear target.  Thus the chance of it working are much lower than any type of target trade that we would enter.  A good target trade spot basically is on every active trader's screen.
p.s.  and yes, within 3 weeks we nailed both the support and the breakout.  :-)    As we've said in the past, in easy tapes, we're all geniuses.  But it still feels good!