Uncle Soy's Duck Blind II

[inflationista]

End of Day Checklist

From The Master Swing Trader II: Market Survival Toolkit, Republished with Permission; McGraw-Hill March, 2010:

Here’s a common scenario. The equity market is winding down toward the closing bell. You’re sitting on a bunch of stocks but don’t know which ones to dump, and which ones to hold overnight. It’s the perfect time to ask ten questions to determine your exposure heading into the close.

1. Did you buy in quiet times or wild times?

It’s better to buy stocks that are relatively quiet that day, in hopes of catching a big move in the following session. This makes them less vulnerable to profit taking or a reversal. Alternatively, if you’ve jumped into a rally or selloff, it’s harder to predict where price will open the next day. In fact, you have about the same odds of making and losing money. The bottom line: it’s never a good idea to hold overnight on a 50-50 coin-flip.

2. Did you miss your first exit?

Profitable exits come in cycles. In other words, your position will move to a point of maximum profit that’s easy to miss if you get too greedy. It then drops away from that price, while the intraday clock ticks toward the closing bell. Holding overnight lets the stock recycle, so you get another shot at the exit you missed the first time around.

3. Is the market closing with buying pressure on the upswing or downswing?

Look at the 15-minute index futures. Do the 5-3-3 Stochastics rise or fall into the closing bell? Falling Stochastics suggest the market will open weaker in the following session, while a rising indicator predicts even higher prices when you wake up the next day.

4. What day of the week is it and what’s on the calendar?

Look for reversals or whipsaws on turnaround Tuesday and continuation of Tuesday’s trend on Wednesday. A strong close on Friday should yield a strong open on Monday, except after an expiration week, when Monday’s session often reverses Friday’s close.

Pull up the economic release schedule for the following day. Many reports hit the wires just before the opening bell. Consider how important that data will be to the market. For example, the Producer Price Index (PPI) has its greatest impact when traders are nervous about inflation.

5. Who’s getting hurt in the current session?

The diabolical market puts its target on a different back each day. That’s why selloffs rotate across diverse sectors in a typical trading week. For example, a Monday opening might be punctuated by numerous downgrades in the lodging and resort stocks. Use this type of information in two ways. First, look at the performance of open positions in targeted sectors. You’re in good shape if they hang tough while other components get crushed. Alternatively, take profits when a kissing cousin of the sector gets pummeled. Here’s an example. You’re long a cruise ship stock when the lodging group gets downgraded. Chances are the hotel selloff will eventually expand into your sector.

6. What is your holding period for the position?

Stick with your trading plan. Did you set a holding period and expected reward target when you picked up the stock? If so, don’t allow that day’s noise to interfere with your strategy. In particular, don’t base your decision on the current profit or loss, as long as your reasons for owning the stock, or selling it short, remain intact.

7. Which companies are reporting earnings after the bell?

Get out of the way if your stock, or a leader in a related sector, is scheduled to report earnings. Trading is never about gambling or “taking a shot”. It’s about assuming risk when you have an edge, and the odds are in your favor. Absolutely no one can predict the market’s reaction to a single earnings report with any degree of accuracy.

8. What total size should you carry overnight?

Decide how much risk you can handle and still get a good night’s sleep. Consider how much danger there is in the market at the specific time. Are you trading quiet conditions or an environment where everyone is walking on pins and needles? For obvious reasons, take home smaller size during periods of higher volatility.

9. Why is your stock ending the day at that particular price?

Stocks move around for many reasons. Most of the time they’re reacting to high noise levels (passive), rather than buying or selling pressure (active). The best holds are stocks moving in your direction because they’re active, or against your direction because they’re passive. Consider adding to passive movement against your position if it fits your risk tolerance.

10. What stock should you buy or sell right now to balance your exposure?

Consider new stocks to take home. These might include a favorite play selling off into support, or a hot rocket that’s faded after a morning run. The trick is to find bargains, and not stocks that other traders have already tapped out.