This column was originally published on RealMoney on March 16 at 11 a.m. ET. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.
One thing about trading, it's never dull! Just when it seemed like the low volatility would lull everyone to sleep, the VIX nearly doubled in a couple of weeks, and all those stocks that were feeling the love in February are now being taken out and shot.
But what's the real problem here? I believe it's not so much the volatility but what it represents: change. Volatility certainly brings challenges along with opportunity. But the biggest challenge for most traders is pretty straightforward: When the market changes, you have to change with it.
But that's easier said than done, because the very things we need to change are the weaknesses that a trending market forgives. When the market was trending nicely, you had time to act, even if your actions were undisciplined. When you saw a stock moving higher, you could watch it, think about it and maybe buy just a little. Then when the stock pulled back, you could hesitate again. But either way, a strong market would bail you out even if you were too slow on the trigger.
This highly volatile market exposes those weaknesses. Now, you don't have a lot of time to think, because that puts you way behind the move. The market falls so fast now that if you hesitate, you'll be selling just as the shorts are pivoting and going long. And if you aren't sure of the rally and wait for a little more evidence, you'll wind up buying stock from the early birds who are taking profits.
The fix for this should be pretty obvious. Have a thesis on the market, a trading plan that's consistent with that thesis and a benchmark for indicating when you are wrong. You'll find that volatility can work in your favor. After all, if you're like most traders, you're impatient. With this highly volatile market, you won't have to wait too long to act!
Let's get to some reader requests.
could be ready to put in a double-top -- or to break out to a new 52-week high. This high-volume pullback to $32 might be just enough of a washout to enable the stock to move higher. I'd wait for a close above $35 before buying. Until then, Alcoa can wait.
has broken above the key $100 level and is now consolidating the move. An uptrend remains one until it is broken, so I'd consider this three-week churning as just congestion before another move higher. But given the volatility in this market, I'd give the stock some wiggle room and keep my stop down below $100.
has been trending lower for almost four months. The channel was fairly well defined, but the latest bout of market weakness has broken it. I'd expect a rally sometime soon, as the stock is close to being oversold. But I'd also look at any rally as an opportunity to sell.
Johnson & Johnson
This weekly chart of
Johnson & Johnson
shows a stock in free fall. It's been down in six of the past eight weeks, with the decline accelerating over the past few weeks. The last low was in early 2006, and that's where I'd look for buyers to step up. Until then, there's no reason to own this stock. It'll take quite a while to repair all the technical damage.
has been trending higher in a volatile series of higher highs and higher lows. I've included the 50-week moving average as a frame of reference because it loosely defines support. Each time the stock has pulled back to that level, the decline has ended and the stock has rallied. A move back above $18 would have me looking for another run at the top.
Be careful out there.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Allis-Chalmers Energy to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
At the time of publication, Fitzpatrick had no positions in any of the stocks mentioned, though positions may change at any time.
Dan Fitzpatrick is the publisher of StockMarketMentor.com, an advisory newsletter and educational forum dedicated to teaching effective risk management and trading methodologies to aspiring traders and investors. He is a former hedge fund manager and a member of the Market Technicians Association, and he now trades from his home in San Diego, Calif. While Fitzpatrick holds various securities licenses, he does not give recommendations to buy or sell stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback;
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