Smart Trading After a Shakeout

Farley outlines swing trades in DoubleClick, RSA Security and Ikon Office Solutions.
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Catastrophic news events have various immediate effects on the market.

Sudden market volatility pulls many hesitant players off the sidelines. Hidden strengths or weakness are revealed in many stocks. Buying or selling pressure that might otherwise take weeks to unwind is vastly accelerated. This fast-forward trading can ignite new rallies or send weak stocks into rapid decline.

Reports of Monday's plane crash in New York hit the airwaves within minutes of the opening bell. Markets sold off hard.

But it took only a few minutes for most stocks to hit their lows of the day. From there, many rallied strongly and closed at or near their highs. It's quite possible that Monday's shakeout hastened the end of the short-term correction.

How will we know for sure the correction is over? We won't know until last week's highs are taken out with conviction. But as long as we hold support at these levels, swing traders can enter new long positions with managed risk.

Just watch the key numbers and act accordingly: 1800 on the

Nasdaq Composite

, 1100 on the

S&P 500

and 1500 on the Nasdaq 100. What about new short sales? Go ahead, but keep tighter stops unless these levels break down hard.

Source: qCharts

DoubleClick

(DCLK)

had a good session on Monday. It opened well on an upgrade, but then sold off with the rest of the technology sector. It recovered almost immediately and now looks like it wants to head higher. Although it's stuck at the last line of resistance, those tall green volume spikes favor an upside breakout. But DCLK may see another pullback before it moves higher.

A couple of cautionary notes on DoubleClick. The "doji" candle (circle) suggests indecision on Monday, right where a good breakout needs committed buyers. Also notice the rising top trendline started in mid-October. These lines can be very tough levels to break. Traders tend to lose patience with rising highs because they don't see decent follow-through. In fact, a stock can roll over violently if price can't break an upper trendline after a few tries. So make sure to wait for a clear upside break before considering a DoubleClick swing position.

Source: qCharts

RSA Security

(RSAS)

, like a few other stocks we've looked at recently, is jammed right between support and resistance. I really like these setups because they can trigger big price moves when they break out of one side or the other. The stock shows bullish green volume spikes off its low at $6. It rallied for about two weeks and mounted the down gap at $13, but then ran into a ceiling at the 50-day moving average.

RSAS is a great setup as long as it holds above the filled gap. After Monday's selloff, it broke through the 50-day moving average for the first time. It could take off from here, and reach $18 to $20 within a week or two. But it might also have a little more work to do before it builds decent upside momentum.

Source: qCharts

Ikon Office Solutions'

(IKN)

price pattern is a real beauty. The stock sits at a two-year high and is just completing a fresh cup-and-handle breakout. It also sold off quickly on Monday, but bounced strongly and moved higher. Considering price has rallied over 60% since September, you'd think the stock was ready for a pullback. But Ikon looks well-rested and appears to have a lot of upside left.

Source: qCharts

Lower-priced stocks can be unpredictable, so we don't want to tie up our capital for too long. In Ikon's case, finding a logical reward target is an easy chore. A longer-term chart shows a 1999 low near $12. This looks like a good place to jump ship. But are old highs or lows relevant to the current price action? In a word, yes. Price has memory. Key resistance levels going back years often stall rallies dead in their tracks.

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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