How to Make Good Things Happen on Bad Days

Consolidation periods, like the one we've been grinding through lately, make it harder for average traders to make money. This happens because they fall into the trap of believing small swings are big trends and start throwing money at them. This eats up capital and undermines confidence.

Daytraders get criticized for their lifestyle, but they practice one of the best strategies for the current bull market. Admittedly most folks don't have the time or disposition to trade in this manner. But they offer a lesson we can all use in tough times -- don't wait for an invitation to get out of a losing trade.

Avoiding positions held longer than one or two days has been a winning strategy for several weeks now. Reversals have followed almost every rally and selloff since August. Nothing in the current price action suggests this will change anytime soon.

One effective strategy in recent days has been to sell the breakout and buy the breakdown. Up gaps are getting filled regularly and breakdowns are drawing in sellers, who are then crushed by short squeezes. At a minimum, stand aside during breakouts and breakdowns and let other traders take the bait. Then watch how the stock acts before risking your own capital.

For example, Medco Health Solutions (MHS - commentary - Cramer's Take) broke out of a three-month cup and handle earlier this week, and then reversed in a rally failure. The downside thrust in the following session confirmed the failure and triggered solid short-sale profits.

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Time of day is a great way to play the current swings. By default, certain hours of the trading session cultivate profit and danger zones. Capitalize on this inefficiency with a first-hour range breakout or breakdown strategy. Wait for the opening range to set up and then trade in the direction the price moves out of its boundaries. ViroPharma (VPHM - commentary - Cramer's Take) built an early range between $20.65 and $21.15 on Tuesday. The price wobbled between these boundaries for three hours and then broke the range to the downside, triggering a steep selloff.

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Playing single-digit stocks still works wonders. Low-priced stocks are risky, but can avoid the whipsaws driven by broader market action. Retail traders dominate most single-digit stocks. These folks are more predictable than most institutions. Yes, you can lose money trading these stocks, but have you checked your mutual fund lately? Distributed Energy Systems (DESC - commentary - Cramer's Take) is a top-notch single-digit performer that broke above resistance at $7.30 last week. It's pulling back to support with the broad market right now and should bounce strongly soon.

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Fortunately, there are still real uptrends and downtrends to trade. These might seem like anomalies in this unforgiving market, but they're there if you look hard enough. In fact, many 52-week breakouts and breakdowns take place every day.

For example, 32 stocks printed new 2005 highs at the New York Stock Exchange during Wednesday's selloff. These winners included a variety of insurance companies, defensive groups and growth stories. Here are 10 stocks from that list. Indeed, good things can happen on very bad days.

ACE Ltd. (ACE)

Barr Laboratories (BRL)

Biovail (BBF)

Cadence Design (CDN)

Carolina Group (CG)

Hilb, Rogal & Hobbs (HRH)

Horizon Lines (HRZ)

Mylan Labs (MYL)

NTT DoCoMo (DCM)

PepsiCo (PEP)

NutriSystem (NTRI - commentary - Cramer's Take)) broke out to a new high this week after raising guidance. The rally triggered an astounding 17 times average volume, as longs entered new positions and shorts exited in a panic.

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The financial markets offers profits in different ways at different times. Traders can't win by forcing their will on the current price action. Instead, spend a little quality time at the school of what works now and adjust your strategies to this tough October game.

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Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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