Momentum trading versus Technical Analysis

As a momentum trader, I'm a big proponent of charts. However, I'm not a big believer in traditional technical analysis.  Here we have the classical patterns.  Simple right?  Except the charts never look like this:

They look like this.

 A real chart has wide ranging bars some are meaningful some not so much.  For the above chart, you could make a case that this chart broke out of a wedge but then it also could be forming a head and shoulders top.  It's all in the eye of the beholder.

Instead of trying to look at clouds and play make believe, I take the approach that there are certain objective truths we can see from charts. I most frequently trade momentum strategies.

These are my truths:

• Stocks go through periods of range contraction and range expansion periods.
• A stock that goes into contraction bullish trending is most likely to have range expansion in that direction. 
• Range expansion often lasts 3 to 5 days depending how much energy has built up.

• Momentum trading allows me to take advantage to this phenomenon with lower   
• If I anticipate the range expansion I can place tighter stops and put more size on the trade and manage my risk  
• 

Interview with Mark Cook-- Market Wizard

A fantastic interview.  

Key points: 

Know your personality

There's always a setup, and a vehicle for your personality

Trading Apple's Earnings Gaps

Apple had another blow out quarter.  People rushed in but that doesn't mean this as an easy trade.
Consider last quarter. Last quarter, I bought immediately after the earnings in A.H. at 100, but the action seemed very tepid so I sold for just a small gain. 

Many people were then commenting on how AAPL was not acting right for having such great earnings and the next day, AAPL endured a harsh fade.  
While that might have  suggested a gap fill,  AAPL would go on to run straight to 119 from this point. in a month and a half. 

 This current quarter, we again saw the Day 1 fade. Day 2 was then what expected but then the long wick day 3.


 Does it then begin to trend from this point like it did last quarter or does it try to fill the gap? It's all conjecture and pointless unless we have a plan. Let's consider the possible scenarios and make a game plan.

• Scenario 1:  let's first  assume this is a just a minor shakeout and that AAP L will resume a trend like it did last quarter.  With that assumption, I believe the buy point is Thursday's close of  18.90, with a stop at 115.50.

• Scenario 2: Let's assume  that Friday's pull back is something more and that the market needs to digest all the selling.  Under this scenario, I want to see a test of the earning's gap.  If AAPL can get into the the gap but then reverse and turn green,  I would enter the the trade setting a stop at the low for the day.

• Scenario 3:, Let's assume we have an inside day followed by a number of narrow range days from this point.  I would then wait for 2-3 weeks for the action to quiet and then look for a momo-burst set up.

For example, in the beginning of November AAPL put in a week of very narrow range days but on November 11, it expanded its range and closed at the high. There's the entry with a stop at 108.  The next day saw continuation closing up +1.55

• Scenario 4: What if apple does something not in the first 3 scenarios?  If a stock is not setup to provide a trade according to my playbook, I let it go. 

With the game plan set, we are now prepared.  Have fun

Hall of Fame -- How QCOM was Born

Everyone knows what happened to QCOM in the year 2000.  Here is how the legend looked in the infancy of its run. 

In February QCOM was very much trading sideways.  on the 22nd it surged.  It then consolidated but held the 10day. on the 27 it had massive volume, followed by even heavier volume the next day. 

Take aways

• When a stock has a strong move and consolidates without pulling back it often has more in store
• when a stock follows an initial power move with an even stronger breakout there is some serious momentum in the name. 

Big Gain Stocks Hall of Fame - RMBS 2000

I suppose you never forget your first-- RMBS was mine.  (note These prices follow a 4-1 split.)

I had originally bought in the 60s. I sold 3 months later at $200,  $50 on this chart. In doing this I misplace this badly and left untold fortunes on the table. But still, I was 19 and there are many lessons still to be learned. 

Characteristics

• Theme -- semiconductor technology that was game changing.  Follows on the heals of QCOM.

 volume picked up on pre-surge.

• 2 week Periods of consolidation right on 10 EA following pre surge. 
• 4 weeks in a row.
• Vicious pull back and then reset. 

Big Gain Stocks Hall of Fame-BVSN '12

As part of my big gain hunting, I've taken a look at some of the best performers.  Extreme momentum movers. Because anything else would be boring.

At the end of 2011-early 2012.  BVSN made a monster move 500%

Surge Characteristics.

• Early volume surge

• over 2 week consolidation held over 20 EMA

• Another volume surge on massive volume. 

• Low Float 4.5M

• 20 MA holds 6 times and then the plunge. 

• 20 MA then acts as resistance 

THEME?
BroadVision is an online commerce and social networking solutions company. 
Was promoted by  National Inflation Association .. Ironic right?

LESSON
BVSN would have been easy to dismiss as a pump and dump and it likely was. But early shorts got smashed nonetheless.   This was a tradeable move.  We can look for secondary entires at support. If a magic line holds, buckle up and buy. 

Chart Set ups

Here is how I set up my Breakout Chart in Tc2000:


The indicators I use for 4% moves are listed. I also overlaid a 7 ATR to give me an idea as to whether a 4% move is significant.

My TI over 105, lists the trend intensity and triggers when the TI exceeds 105. I over laid a 6Ema indicator because I use that moving average frequently for determining exits on momentum bursts.  Dots on top means the stock is above the 6EMA dot below means the stock is below.

so combined we have CDXS, which I took a position in today.  It got a 4% spike from a low volatility period which has triggered a big % run. I just hit a TI 105 and is above a 6EMA.