Up or Down, Daytraders Love Momentum

As I have said before: up or down, I don't care. I just like momentum. This past week gave me exactly that -- momentum, and plenty of it!

On Thursday, Oct. 12, I was watching Cisco Systems (CSCO Quote), one of the stocks I always watch. It had started a fairly fast drop from its intraday high of $53.63 at 9:51 a.m. EDT, bounced, then started to oscillate. I was waiting for one of those oscillations to be greater than 1.5 points. Generally speaking, the further it falls in the least amount of time, the greater the bounce will be when it does find bottom.

By 11:01 a.m., the momentum had clearly shifted to the downside. Buying dried up, paused for a very quick period, then selling rushed in. For the next 26 minutes, Cisco dropped rapidly, tick by tick, and finally found bottom $2.44 later.

I was expecting this to be a very quick bottom after watching bottoms and tops that day, so when the ratio of buys and sells shifted clearly to the buy side at 11:27 a.m., I entered the trade at $50.25.

This was not as clear a bottom as I normally like, but I felt the upside potential was worth the extra risk. If I was wrong, my strategy was to exit immediately and try to catch the next bottom.

As you can see from the chart, Cisco did bottom and bounce rapidly to a high of $51.44 at 11:36 a.m., where it again made a rapid reversal. I exited the trade at $51.25 for a quick $2 gain.

I have never believed in superstitions, so after I tossed a pound of salt over my left and right shoulders, I was actually brave enough to trade on Friday Oct. 13.

I was watching DoubleClick (DCLK Quote) in the premarket because the company released earnings news and an analyst had downgraded the company to a buy from a strong buy. Although the company met analyst earnings estimates, it also expressed concern that future earnings would be flat.

As you can see from the chart, the stock closed the previous day at $18.50 and was punished by Wall Street when it opened the next day more than six points lower. This is my classic dumper play, which I discussed in my Feb. 28 column, 'Dumpers' -- Making Money on a Bad Story.

I look for stocks that dump more than 20% from the previous day's close on moderate to weak bad news, but I stay away from news that can be devastating, such as Securities and Exchange Commission investigations, fraud and bankruptcies. DoubleClick's situation fit the bill -- nothing too damaging there. I play the resulting bottom the next day after the Street finally realizes it overreacted to this news.

Generally speaking, the normal pattern is for the stock to gap down (open lower than it closed the previous day), dip a bit at the open, then bounce. I was watching this stock in the premarket and saw the buying momentum pick up, then shift to the sell side just before the open. This told me that the pattern was about to repeat, dip, then bounce.

The chart shows that it did just that. It opened at $11.86, dipped immediately to $11.13, then bounced. Had it been all selling in the premarket, I would not have attempted the bounce. But the mixture of buying and selling meant there was still positive interest in the stock.

The stock made a very readable but slow bottom and I entered the trade at 9:45 a.m. at $11.25. I rode the stock to the first step up where it paused and selling came in. I exited at $12.25 for a quick $1 profit. Immediately after I exited, the stock dipped then bounced up to $13, but I was not sorry for sticking to my rules.

Now, I don't normally like to hold stocks over the weekend, but later that day I was still watching DoubleClick. Just before the close, the buying momentum picked up tremendously, and one minute before the close I entered the trade at $12.44. I am playing this for the gap, counting on the buying momentum to carry through to Monday morning and cause it to gap up (open higher than it closed the previous session), then sell at or before the bell.

Tune in to my next column to see whether I was right. If I was wrong, I will blame that darned black cat passing by or the fact that it was only a salt substitute I threw over my shoulder. It was Friday the 13th, after all! Happy trading.