Get in Sync With the Market's Rhythm

Stocks tend to trade in ebbs and flows. Get a feel for the patterns to increase your odds.
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This column was originally published on RealMoney on Jan. 4 at 11:00 a.m. EST. It's being republished as a bonus for TheStreet.com readers.

The bull stampede we saw Tuesday looked more like Pamplona than Wall Street. If you didn't buy early, you had a second chance to run with the bulls in the afternoon. But don't lose heart if you missed the afternoon run. There are many differences between good and bad traders -- aside from the obvious fact that the good ones tend to take money from the bad ones. Patience is the hallmark of a good trader.

If you need to make money every single day, then you probably need to get a job at 7-Eleven. It's much easier to be patient when you have a longer time horizon. You realize that there certainly is a rhythm to the market, and that it pays to get in sync with it rather than just piling in on any strong day. One exercise that I used to practice all the time in an effort to develop patience was to count the number of successive advancing days (or weeks) on a chart for an individual stock. Each stock is different, because the participants are different.

For example,

Google

(GOOG) - Get Report

tends to advance between six and eight weeks before it undergoes a sideways consolidation. What does this tell me? Should I run a backtest and generate a profit-and-loss profile for a trading strategy built around this behavior? I don't think so. But I certainly can use this information to time entries and exits with a bit more patience.

Get a rough estimate of the rhythm of each stock you trade. Once you get a feel for the ebb and flow, just wait for the right opportunity. Depending on your trading style, you might be waiting for weeks before the time is right to pounce. But you're increasing your odds of producing a successful trade, rather than just putting another position on the books so you can watch it do nothing for a while.

As you look at these five charts, try to find the natural rhythm of each stock. They're all unique.

Note how the uptrend at the left side of the weekly

Yahoo!

(YHOO)

chart is defined by the rising support line. The last high in 2004 failed to tag resistance, and that was an effective signal that buying pressure was on the wane. (I recently wrote about the concept of

using resistance rather than support to define an uptrend.) Over the past year, Yahoo! has been under distribution, resulting in a long consolidation period. Over the past several weeks, Yahoo! has remained above $40, and it looks poised to spring higher. I'd keep a fairly tight stop on this position, but it looks as though the bulls are ready to run.

Evergreen Solar

(ESLR)

is in an established uptrend. The current range is between $10 and $12.50. This solar power company should continue to do well, so you might want to use this period of consolidation as an opportunity to buy.

Sanofi-Aventis

(SNY) - Get Report

is challenging its 2005 high. The gap that took the stock above $45 a couple of weeks ago is holding. Last week's pullback was on light volume, which is healthy for an advancing stock, so I'd be a buyer on any break above resistance.

F5 Networks

(FFIV) - Get Report

is due to announce earnings Jan. 19. It looks to me as if the market is anticipating good news. I'd be a buyer on any test of the breakout point. If you're already long, be sure to use a stop.

Charles Schwab

(SCHW) - Get Report

has been moving higher in a series of stair-step motions. Each pullback leads to an advance, followed by a bit of sideways consolidation. It looks like it's at a good buy point now, because Tuesday's low defines the bottom of the range.

Be careful out there.

At time of publication, Fitzpatrick was long GOOG, though positions may change at any time.

Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick has lectured throughout the U.S. on the proper use of technical analysis and options trading. At time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback;

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