I’ll be honest, I’m swinging for the fences with the ideas and setups I trade and discuss here. I’m using a lot of leverage and hoping to be compensated for the risk. It’s basically a big psychological game of chicken against my own fear and greed and various other emotions that all occur when winning and losing money. That’s my version of trading in a nutshell.
In order to bear the psychological strain I like to plan ahead and work in some contradictory research just in case all of my best laid plans go to hell. If I feel like I have too much one sided exposure I want to be able to quickly deploy a few ideas contrary to my primary thesis – as a hedge.
As you probably know, my forecast is for more blood, basically a test of the 2007 high’s on the Russel 2000 Index before we see a nice bounce in equities. In this article I’m going to share how I’m planning for the eventual bounce by monitoring which companies are holding up well. As I mentioned in my last article (with a horrendous cover photo much to Le Fly’s displeasure) I discussed buying strength and selling weakness: One Weird Trick to Pick Stocks!!
In a similar fashion to the exercise in that article, I find it valuable to evaluate companies that are trading UP in a hugely DOWN tape. These are the companies that I will go long either for a bounce, or to hedge my short exposure.
Therefore, I ran another screen using the following metrics:
- +Mid-sized market cap. (over $2bln)
- Average Volume over 1M
- Optionable and Shortable
- Price over $5
- Priced above 200 day simple moving average
- and most importantly: Price UP
I then removed the Utilities and Gold companies (which may honestly be good buys here) and the Oil & Gas companies. Remember, I’m not going long commodity exposure until this happens.
The results included about 25 companies that I then scanned for 2 qualities: 1) Solid Charts, and 2) Option liquidity. The last part is qualitative and everyone will have their own opinions, likes and dislikes. Note: option liquidity is important; there’s probably only around 250 companies with enough option volume to have tradeable bid/ask spreads – which substantially shrinks the universe of possibilities.
Here’s the results (in no particular order):
- Allstate Corp. (ALL) – Financial
- Altria Group Inc. (MO) – Consumer Goods
- Comcast Corp. (CMCSA) – Services
- Lockheed Martin Corp. (LMT) – Industrial Goods
- Raytheon Co. (RTN) – Industrial Goods
- Verizon Communications, Inc. (VZ) – Technology
- AT&T Inc. (T) – Technology
So Here’s the Trade:
Going forward, I’ll monitor these names for continued relative strength. If I think the market is going to turn or I need a hedge simply to reduce the psychological stress, I’ll go long one or more of those companies – following some sort of structured plan.
I’ve provided two examples below. The first is Raytheon (RTN) – refer to the long term chart first, then the short term structured setup:
Pretty simple here – enter on a break of the green line, scrap the idea on a break of the red line.
Next up is Lockheed Martin (LMT) – long term, then short term:
Same idea – enter on strength (green line), scrap it on weakness (red line).
As an aside, I’ve been trying to come up with long term “investor” type ideas. If I had a lot of money to manage I’d be focusing on three areas:
- Military/Defense Spending
- Health Care
- Water
I’m still researching these areas, and it’ll be a future article topic, but I’m glad my screen turned up some companies from these sectors.
Last note: Monday is extremely important, the markets are hovering on short term support. If we break down below it there should be a significant flush. So sharpen your swords and put on your best armor Monday morning, it should be interesting.
Follow me on Twitter @dyer440.
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