How to Profit in a Mixed-Up Market

What's a swing trader to do without clear signals? Look at stocks from both sides.
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Up or down, does it really matter? Everybody has an opinion when it comes to the markets. But talk is cheap, and you can't turn a profit without making a good trade. Whether we rally from here or drop off a cliff, plan now for whatever the market gives you.

The trading range that began in early October may break soon, but the fat lady hasn't sung yet. Accumulation has been weak throughout the move, and we still face significant overhead supply. Unfortunately, this type of pattern could turn out to be a replay of last spring. Back then, price went nowhere for months while pundits eagerly debated the next move.

Of course, we could be headed higher in a big way. The government's massive liquidity infusion, capped by last week's long-bond news, radically alters the trading landscape. At the least, a market that many folks assumed was overpriced may not be overpriced at all.

So what's a swing trader to do without clear signals or dependable follow-through? First of all, shorten your holding period and be willing to take smaller profits, at least until we see a substantial breakout or breakdown. Second, pay close attention and don't miss the opportunities that show up every day.

One of the best ways to anticipate market direction is to role-play both bullish and bearish outcomes. Start by taking one bias and looking closely at the price action. Then change hats quickly and study the same information from the other side. This simple exercise gets you ready for whatever happens next.

Source: qCharts

Lets play devil's advocate with semiconductors. First, be a good bull: See how the Philadelphia Semiconductor Index broke through market number 500 during Monday's session? It also cleared the 50-day moving average and is showing good momentum. To top things off, the index just recorded its highest closing price since early September. Good time to load up on the chips?

But if you put bear fangs on, a different picture emerges. The bulls missed the post-Sept. 11 gap down, which now represents strong resistance waiting to be overcome. In fact, the latest bounce just filled the gap right at 62% Fibonacci resistance. And what about the high closing price? Looks like a bear trap for sure.

When you examine a sector that could go either way, find setups to take advantage of either outcome. Choose longs from among the best performers you can find in that group. Likewise, pick short sales from the worst offenders. Then forget about the sector entirely and enter positions using triggers on the individual charts. Your careful pre-selection has already reduced risk should the broader market take off in the wrong direction.

Let's pick out a couple of chipmakers to cover us on both sides of the action.

Source: qCharts

Conexant Systems

(CNXT) - Get Report

might be close to breaking out of an eight-month base. The bulls should enjoy the developing cup-and-handle pattern. It's a kissing cousin to Gary B. Smith's popular GBS Classic. This triple-top breakout often generates one of the most dependable setups in swing trading.

Cups and handles offer several good entry points. Buy within the handle itself during the gentle rise. Or wait for the breakout and buy on a pullback. In either case, expect a strong vertical move on high volume right after the stock mounts resistance. Place a tight stop under your position if you don't get that type of price action immediately, because a pattern failure could be violent.

Source: qCharts

Emcore

(EMKR) - Get Report

is a clear underachiever in the semiconductor group. It lags behind other manufacturers that jumped off their bear-market lows in the last month. It also suffers from an ominous "island reversal." Notice how the two gaps that create this pattern now present strong resistance on any rally attempt.

Don't be fooled by the short distance from EMKR's Monday close to its early October lows. A good short sale could capture a drop of over 20%. And it shouldn't take much of a push for this stock to fall down the stairs.

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. At the time of publication, Farley held no positions in any of the stocks mentioned in this column. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to

Alan.Farley@TheStreet.com.

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