Schaeffer's Trading Floor Blog

Must Read

by 6/27/2005 1:34 PM
Stocks quoted in this article:

Last week we touched on the housing sector...and today Bernie offers his thoughts in this column - "Keeping it Real (Estate)"...

If you are interested in this volatile group of stocks, make sure you check this out...

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Index Check

by 6/27/2005 12:34 PM
Stocks quoted in this article:

I am beginning to think that perhaps Ryan Detrick was on to something....Last week the market did absolutely nothing while I was in the office and then moved big the two days I was out. I come back to the office today and the market is just grinding sideways...

As you can see, the broad market indices seem to be content to sit on the breakeven mark, though a few sectors are on the move...gold stocks are now the weakest group, but networkers are close behind and semis aren't looking strong...on the upside housing stocks are bouncing back from recent selling as the HGX is competing with oil related stocks...

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Stocks quoted in this article:

One of the "big" movers last week was General Electric (GE)...I know you may be sick of hearing about this stock so I will keep my comments short. What I wanted to note was this chart below...


Created with SuperCharts by Omega Research

I have touched on this support zone in the past so I thought it was worth noting it is being tested. This is worth watching because of the overwhelming complacency from the Street. Back in early-May I showed the table below of historical analysts ratings that I first presented in this column:

A check of current data shows little has changed as 84 percent of the analysts tracked by Zacks still give the shares a "buy". If the shares fail to bounce here some of the bulls may be begin to rethink their position...

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How Could I Forget?

by 6/27/2005 11:20 AM
Stocks quoted in this article:

An alert was just triggered on my screen as IBM traded below 74...


Created with SuperCharts by Omega Research

I pulled up the chart above and at first glance couldn't see the significance of this level. A break of 74 would put the shares below their low from earlier this month, but clearly 72 is the much bigger area to watch.

But then I remembered why...Earlier this month Dave bet me a t-shirt that IBM would hit 85 before 65 so I set the alert to remind me to watch the shares as they neared that big support zone.

A check of the sentiment profile shows that there is still little in the way of skepticism (which is part of the reason why the scorecard registers an overall reading of just one) so this is still a situation to watch...

  • Percent of analysts tracked by Zacks who rate the stock with a "buy": 58%
  • Number of analysts tracked by Zacks: 19
  • Short interest as a percent of float: 0.52%
  • Short interest ratio: 0.74
  • Put/call ratio percent rank: 0.0%


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Stocks quoted in this article:

Continuing the discussion from last week on the use of stops, Gary (who started the discussion) says - "Regarding the use of stops, I have frequently heard the arguments against using them, but I beg to differ. I have never yet regretted using a stop. The problem is, many people try to make the use of stops too simplistic. My use of stops is very disciplined and I use a number of different scenarios including:

  1. I never place a hard stop with my broker for a listed stock. Why? Because of the spread and the fact that I don't trust specialists. However, I do alarm my positions and when they approach my stop, I manage my way out of the trade. I definitely use a stop. I just don't automate it for listed stocks.
  2. If I am trading a microcap Nasdaq stock, I use a stop limit because these don't tend to move more a penny or so at a time. Many platforms also allow you to use "discretion" on a limit order meaning you can give it +/- window. This also allows me to use advanced features such as "show only" so that I can serve up the shares without tipping my hand as to how many I actually have to sell. This prevents the bid from collapsing. You have to know the trading behavior of a stock well in order to use stop limits, however, I don't recommend it unless you are an experienced trader.
  3. The use of stops for day trading is a must. Stocks rarely gap during the trading day so I have never found this to be an excuse for not using stops. Keep in mind that if a major gap occurs during the day, it will be drivne by news and trading will likely be halted, giving you time to cancel the stop and manage your way out of the trade.
  4. If a stock is extremely volatile or I am holding a large position I will use mental stops by alarming the share price and managing my way out of the trade. This way I can avoid collapsing the bid or tipping my hand as to how many shares I have to sell. There also seems to be this myth that stop orders are visible to traders. I don't believe this to be true. It is my understanding that the brokers hold the stop market orders until they trigger and then submit a normal market order. Market orders do not show up on level 2. A stop limit might be slightly different, but I still do no believe these will be submitted until they trigger and it is only then that they show up on level 2.
As for the argument about huge gaps down overnight, this can be a problem. However, this is still no excuse, in my mind, for not using stops. In swing and long term trades, I never place hard stops, but I do alarm my stops. If the stock gaps against me in the morning, I use disaster management rules to manage my way out of the trade (sometimes I wait 30 minutes to see if it will give me an exit on a bounce). The same reasoning applies to limit orders at targets. What if a stop gaps for you and you have a limit order placed below the gap. You can leave a lot of profit on the table. This is no excuse for not having a target. If you don't want to put in a hard limit order, use alarms and either trail stop once past your initial target or adjust your targets and stops accordingly. I just personally think it is extremely dangerous to avoid using stops.

There are too many way to use them to simplistically say they are no good. There has to be some point at which you say this trade is no longer working. If you hold onto the trade indefinitely waiting for it to reverse you could ending either losing a great deal of money or having to sit on "dead" money for a long time and "dead" money is one of the worst things that can happen to income traders like me. In my particular case, if I had not followed my stops on my bad day, I would have turned it into a disastrous day and I would never have been able to make up the losses the following day as I did. Stops are an absolute necessity for me and I never enter a single trade without having a stop and target(s) in mind.

My response - I apologize for the length of this post, but I thought Gary brought up some great points that might benefit some of you. In the end, each person needs to have a trading style that fits their personality. The various emails on this topic highlights how different those opinions can be so I wanted to make sure we explore the issue of stops from many perspectives. Thank you again to everyone who has contributed to this effort!


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