Trading Against the Grain

Wow -- what a week! Wednesday, Oct. 3 brought a volatility into the market that reminded me of the good old days. Sharp swings and dramatic momentum with a great deal of carry-through and readable tops created a day full of low-hanging fruit and incredible profit.

Looking at the Nasdaq chart above, one would think that the proper play for a short-term Momentum Trader on Oct. 3 would have been to play the bottoms, give yourself some wiggle room and ride the incredible upward momentum. Although I did play a number of longs that day, the majority of my plays were actually shorts.

Even though the trend was definitely up and playing shorts was against the trend, I did this because reading the tops for some reason was much easier than reading the bottoms. Sometimes going against the trend is what you have to do if that is the clearer picture.

Here's an example that worked well for me last week:

During the Oct. 3 premarket, I was watching BE Aerospace(BEAV Quote) because it had been extremely volatile over the past two days because of news about its commercial airline cockpit security products, and several pacts that had an immediate impact on the company's bottom line.

As you can see from the chart above, BEAV climbed over two dollars on Oct. 2 but was gapping down the morning of Oct. 3. Not only was it gapping down, but the premarket action was very weak. This was a very strong "short" flag for me, as almost everything else was showing strength in the premarket. The plan was to short at the open, but I was afraid that I would not be able to enter quick enough because I felt it would fall right from the open.

However, the strength of the overall market held it up long enough to enter a short position right at the bell at $11.50. As you can see from the chart above, BEAV climbed slightly at the open, then dropped rapidly. BEAV dropped for the next five minutes until 9:35 a.m. EDT when the selling abruptly stopped, then paused for a second or two before buying came in after it hit $10.80. By the time my cover order was filled it had climbed to $11, but I still had a quick 50-cent profit.

At 09:48 EDT after hitting $11.60, the buying in BEAV slowed, paused and selling started to come in, at which time I entered another short position, trying to catch the next wave down. It climbed to $11.75 moments after my entry and I almost covered my loss, but it quickly dropped from there.

It bounced again at 10:02 a.m. EDT, but I decided to play with my profits and give myself some wiggle room since the buy-to-sell ratio during this rally was weak. It dropped for the next 50 minutes, where it looked as if it was going to put in a good, solid bottom, and I exited at 10:59 a.m. EDT at $10.25 for a $1.35 profit. Well, I was wrong about the validity of this bottom and it dropped another 25 cents, but I was happy with my exit as I stuck to my rules and exited when my signals showed a bottom.

Keep in mind I made this short play and several others while the market was in a darn near vertical climb up -- not because I felt they were going to be more profitable trades than going long, but because the tops were much easier to read than the bottoms. I would rather play in a poker game with marked cards that I can read for half the profit, than a game where I can't read the cards.

I like the sure thing and high percentages or I won't play. I was stopped out of several plays that day as the trading was fast and furious, but when losses and gains were added up, it was a very profitable day.