RIMM Moves to the Momentum Beat

What have momentum traders been up to over the last week or so? Well, as always, we are focusing on the hottest news stocks and IPOs, such as Baidu.com (BIDU - commentary - Cramer's Take). In addition, though, we have been playing any unusual spikes in high-volume market participators such as Research In Motion (RIMM - commentary - Cramer's Take) and QLogic (QLGC - commentary - Cramer's Take). As the market topped and turned, conviction in general seems to have stalled, and any sharper moves up or down have been met with very predictable and playable counter-reactive price adjustments. And lately these have been very profitable trading opportunities.

There are a few basic economic principles that I base my daytrading on. First of all, I believe in an efficient market, where the value of a stock is the price I see. I have no choice but to accept that value, whether or not it is logical to me. It is not my job to argue with the market. The more I try to question the judgement of the market, the more trouble I will get myself into. If I want to catch big illogical opportunities and avoid stubbornly holding stocks that are going against me, I have to learn to take the market at face value.

I also believe that the market is continuously in the process of clearing, or trying to find a balance between supply and demand. News, events and other catalysts come in to knock things off course. Even the early momentum itself, when volume is at its highest during the first two hours of trading, can be a catalyst, as traders react to each other's decisions. And all these catalysts are generally met with over-reactions, but counter-reactions will always bring them back toward an equilibrium, until a new value has been assigned. As a daytrader, I am primarily interested in playing these short-term adjustments.

To predictably play these adjustments, though, it helps to align the micro-momentum of the individual stock with the macro-momentum of the general market. In a micro-sense, the prices of individual stocks are always moving up or down, and then adjusting back to a temporary equilibrium. That equilibrium most often aligns with the larger market equilibrium, sometimes loosely and sometimes more tightly. So it's important for me to point my trades in the direction of the market momentum.

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Ken Wolff is founder of MTrader.com, the first educational daytrading site on the Net, and co-founder of Investingonmomentum.com, a Web site devoted to short-term potential for retirement accounts. TheStreet.com has no affiliation with InvestingOnMomentum.com, and no endorsement of InvestingOnMomentum.com or momentum trading is intended. At the time of publication, Wolff had no positions in any of the securities mentioned in this column, but positions may change at any time. While Wolff cannot provide investment advice or recommendations here, he appreciates your feedback; click here to send him an email.