Change the word jump to chop in House of Pain’s smash hit “Jump Around” and you’ve have the perfect theme song for the markets lately. Choppy action has dictated this market over the last couple of sessions with up moves, down moves, and sometimes no movement at all. During periods like this we feel that patience and preparation is of the utmost importance. Just because the market may not be presenting clear moves right now, that doesn’t mean you can’t be ready for them when they are clearly revealed.
Just as we have identified 1,357 as a key level for the S&P500, you as a trader should be able to identify similar levels in individual stocks. Once you have done you can simply watch and wait. The best strategy is to pick out your key support level on the low, and the key resistance on the high. Then say to yourself, “Ok, if xyz breaks above point y I will get bullish, but if it breaks below point x I will get bearish.” Formulating these plans now, when the market and stocks are just chopping around are great ways to execute without hesitation once the next directional move becomes more clear.
For example, stocks like Salesforce (CRM) and Chipotle (CMG) are two stocks that until recently were right near all time highs. Over the last few days though each has suffered drastically, experiencing % declines not seen yet during 2012. These are two names that if the broader market does break support, we suspect could see even greater downward pressure. On the flip side we have a stock like Yum Brands (YUM) that in the face of broader market weakness has managed to stay within striking distance of all time highs. If the broader indexes hold support and turn higher, YUM is in prime position already to break all time highs.
All told that took us about 5 minutes to check up on some names that we are familiar with and come up with these thesis’s. The trader who is prepared for numerous outcomes (mainly both bullish and bearish) is the one who can better navigate thru them for profits. While you can, and we ourselves often do, have a bias based on your analysis, you need to understand that the market does not have to do anything. Instead of trying to figure out what it has to do, or will do, we find it best to be prepared to react to what it does do.
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