Become a Method Trader

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“The Method” is a style of acting that was popularized by Lee Strasberg (Hyman Roth in The Godfather Part II) and Stella Adler in the 1950’s. Method acting dictates that actors become completely immersed into the lives of the characters that they portray, to the point where they stay “in character” through the duration of the production. As can example, boxing experts noted that Robert De Niro could have actually contended for a world championship while rigorously training to portray Jake LaMotta in the movie, Raging Bull. Later on in the film when De Niro portrayed a washed up LaMotta, he stopped training and intentionally put on fifty pounds for the role.

In trading, it is also important to block out your personal feelings and get into character. Normally, when I talk about not letting personal feeling interfere with your trading, I am referring to negative emotions such as blind greed, frustration, panic, etc.. However, in this case I am referring to all of the positive, patriotic emotions many traders have felt over the past sixteen hours. The killing of Osama Bin Laden was understandably a significant moment for Americans and freedom-loving people around the world. However, using that event as an emotional crutch for you to trade any way you see fit will probably not have your portfolio experiencing a fairy-tale ending. In the exuberance that followed the announcement last evening, it was easy to expect the market to see a potent rally today, seeing as the futures were indicating as much. Of course, the opening move was quickly faded and a bit of reality set in. We may still see a powerful move in the coming weeks, but for today the exuberance has been chilled and the much-needed consolidation is in progress.

As much as it would have fit the storyline if the S&P 500 had been up 3-4% today, Mr. Market only bleeds green, even if the rest of us bleed red, white and blue.

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You will recall that in one of my posts last week, I discussed the notion of stock breakouts being postponed versus cancelled. Today, with the broad market starting to consolidate, we are seeing several stocks that were set up to breakout coming into this week, only to lose the breakout setup today. However, and this is extremely important to note, just because a stock fails to break higher from a bullish setup, it does not necessarily follow that it is a high probability bearish swing trading setup. Instead, you are going to have to see shades of gray in the market, and understand that most of these stocks likely need more time. Even if they are actually reversing to the point where they will become viable shorts, then most of them will first need to experience far greater technical damage than what we are seeing today.

LULU is a pretty clear example of this phenomenon.

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[youtube:http://www.youtube.com/watch?v=QezIBLK5WHg 550 412] _________________

After a solidly green morning, the market has flip-flopped and turned lower. Given the short-term extended conditions of the senior indices, this should not come as a huge surprise. To be sure, a few days of broad market consolidation is probably a session or two overdue. With that said, I remain steadfast in my belief that an increased attention to individual stock selection is valued now more than ever.

After the steep run that we have seen over the past week, I will be watching closely to see how this afternoon plays out. If we close at or near the lows of the session on the S&P 500, then we would have a fairly cautious setup going forward over the next few days. However, it is crucial to understand the context in which this may happen. We recently broke out from a key area of resistance, and some short-term consolidation would still be very bullish provided that our primary breakout area of 1330-1344 holds as firm support.

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The broad market breakout that we saw last Tuesday is pressing forward this morning. However, the price action is not exactly the 3% or so rally that exuberant traders expected to see after last evening’s news that Osama Bin Laden had been killed. Nonetheless, we are firmly in the green again.

At this point, it is quite obvious that the senior indices are short-term extended. As I wrote throughout the weekend in a series of posts, though, it is best to focus on the individual price action. As we appear to be headed higher off of the breach and confirmation of the inverted head & shoulders patterns on the S&P 500 and Nasdaq Composite Index, it will probably continue to be much more of stock picker’s market.

Top Ideas: FNSR MGM SINA WPRT WYNN

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It turns out the “silver” (Go SLV!) medal winner of the most recent Presidential Election is legally obligated by the U.S. Constitution to bomb our enemies in person. True Story.

The Straight Talk Express, My Friends!!!!!!!!!!!! -John McCain

[youtube:http://www.youtube.com/watch?v=wcW_Ygs6hm0&feature=related 550 412]

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As I wrote last week, try to avoid being a “Tavern on the Green Trader.” The buzz this evening is over the huge drop in silver. However, if you are a stock trader, then your time is best served focusing on the price action in equities. Here are some more stock ideas for this week, in addition to those that I gave you earlier this weekend here and here.

See my notes on the annotated charts below for analysis and price triggers.

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