Some questions about how to take positions to the downside. (May 30, 2001)

  The plays to the downside are very similar to upside plays were we look for a break over resistance: we get the breakout we can play and we may get the test of the breakout we can play when the stock tests the new support and moves up. Downside is the same way when not in an established downtrend: play the break below support (50 day MVA or price consolidations) as it happens, or wait for the rebound up to that support level and then a fall back down from there. When it fails the test, i.e., when it taps at the old support level (now resistance) and fails and starts to fall, that is the entry point. We then play that move down to the next support level, or until we see the stock show signs of bottoming such as a doji on the candlestick chart (basically a lower low intraday and then a close for the session very close to where the stock opened for the day), a higher volume down day but the stock does not lose much ground (as many buyers are stepping in as there are sellers), or just a bounce back higher on better volume. Those are cues to close out the positions and bank the profit. We then wait for the next opportunity either on that stock (if it starts to form a downtrend) or on another stock breaking support.

If the downward action was short lived (as it often is), we could then see the action back to the upside. That is partly what we were talking about in the summary when we discussed the indexes possibly finding a trading range. We can use that to make some very handsome profits as the indexes and stocks set up fairly regular rolling ranges. Identify what the market is doing and then take what the market is giving you.


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