Stocks are set to open lower this morning, as it appears that the market has priced in the upcoming interest rate cuts which are expected to be made by the Fed over the next few months.
That said, traders will be shifting their attention to the G-20 summit, which is set for June 28-29.
Some expect that President Trump will be meeting with China’s President Xi to discuss trade, and hopefully come to a deal… however, Chinese officials have yet to confirm a meeting between the two leaders.
Uncertainty surrounding the outcome of the G-20 summit, and an upcoming FOMC meeting should keep this market on edge for the next few weeks.
Nonetheless, I was expecting some sort of a pullback on the SPY based on my chart analysis.
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That said, I’m expecting this market to trade sideways, or possibly pullback a little.
However, there are a few names that I’m looking at, including:
- Rent A Center (RCII) 3 and 8 EMA cross over the 20 MA
- EchoStar Corporation (STATS) Pennant and looking for the move out
- ManpowerGroup (MAN) Push off the 50 MA with volume.
You see, I like to be ultra-prepared for the trading day. That means having everything written out and detailed. When you trade off the seat of your chair, then you are prone to making emotional decisions led by fear and greed.
For example, have you ever tried to catch a falling knife?
It’s when a stock is getting crushed, and being sold aggressively … but instead of waiting for it to find support and bottom out… emotions get the best of the trader, and they start thinking along these lines:
I’m going to make so much money if this thing reverses…
I can’t believe this stock is down so much, it has to go back up.
The market is just stupid, and it will realize that this stock is a buy… this is probably one of those unique situations where I should ignore my stops.
If I just keep doubling down it will eventually turn around.
This time it’s different…
That said, I do like to trade stocks that have had recent weakness… but it’s a lot different than trying to catch a falling knife. Read on to learn how I trade a stock breakdown, as well as some useful tips that you can use to apply to your trading.
If you don’t know already, I’m a technical trader who focuses on moving averages and chart patterns.
The reason I like to use charts and indicators is due to the fact they allow me to spot clear entries, stop-loss, and target price levels.
You see, it helps to remove the emotions when you’re trading stocks… basically, you’re not buying a stock just because “you think” it’ll go up or catch a bounce. Rather, you have a clear set of guidelines to follow.
For example, here’s a look at one of my checklists for a chart pattern I like to follow.
___1. The trend must be in a definable downtrend, 8 EMA is below or equal to the 20 SMA, 20 SMA is below the 34 EMA, 34 EMA is below the 50 SMA, and 50 SMA is below the 200 SMA.
___2. Some form of a bottom forming. Some examples include, but are not limited to. double bottom, lower high, higher low, higher high, multi-bar candlestick bottom.
___3. There should be 10% or more from the 8 EMA to the 34 EMA.
___4. Yesterday’s close must be above 8 EMA.
___5. Buy on positive trading above the 8 EMA after yesterday’s close above the 8 EMA.
___6. Take profits on at least half of the position at the 34 EMA on the daily chart, or 200 SMA on the 60 minute chart, whichever comes first.
___7. Use a stop on a close below the 8 EMA.
Now, if you don’t know what SMA and EMA mean, check out my last post on the importance of moving averages.
With this checklist, I’m mainly looking for the price action and moving averages to signal when I should get in and take profits.
For example, here’s a look at Overstock.com Inc. (OSTK).
Notice how this stock has just been getting beat up over the last three months. Those who didn’t wait for a clear signal in OSTK were just trying to catch a falling knife.
You see, the stock was trading in the high $30s last year… and it was one of those Bitcoin stocks. Now, if you didn’t heart, BTC / USD had a massive run that started in March and is still continuing.
Heck, some traders actually bought OSTK… thinking, the price of Bitcoin would drive it higher.
Now, I wasn’t even looking at or thinking of buying this stock because there wasn’t a clear entry, exit or stock-loss area. In other words, if I bought OSTK without developing a thesis, I would’ve been trading off emotions… and essentially gambling.
However, that’s not how I trade.
I actually build watchlists of stocks and the patterns I’m watching in them – which I send to clients… and I’m actually keeping an eye on OSTK cause the charts could be signaling a buying opportunity.
Now, if you go back to the checklist from earlier…
You can see the stock was clearly in a downtrend. Then, you have the 8 EMA below the 20 SMA… the 20 SMA below the 34 EMA, and so on.
Right now, the stock looks like he has some bottom forming with a higher high and higher low.
The price action we’re waiting for is positive trading above the 8 EMA (the blue line), after we get a close above yesterday’s close… once we see that, we buy the stock.
Thereafter, we’ll look to stop out of the position if the stock closes below the 8 EMA… the goal here is to take profits on at least half the position at the 34 EMA on the daily chart… or the 200 SMA on the hourly chart, whichever comes first.
That’s just one way to avoid getting sliced by a falling knife. That said, the next time you see a stock that’s breaking down… look at the chart and moving averages, and wait for the price action to confirm a potential reversal.
Now, if you want to learn how to time your entries and exits, receive real-time text and email alerts, and access to video lessons… click here to get started.