Securities and Exchange Commission Chairman Arthur Levitt has said in the past that when the market turned from bull to bear, daytraders would get killed. Well, just like mama used to say, don't believe everything you hear. When the Nasdaq dumped more than 500 points last Tuesday -- an official bear market -- I had my most profitable trading day ever. It was like shooting ducks in a pond.
The strength of being a daytrader is that I never know what to expect, and as such, I don't fall into the pit of
the future. I'm the ultimate realist and can only play the cards that are dealt me. This is especially true during periods of extreme volatility and market fluctuations. Let me take you through how I played the
slaughter of April 4.
I gathered all the news I could in the premarket to locate an indicator. An indicator is the most popular stock that has the highest premarket volume. I normally expect my indicator stock to be the strongest stock and have the greatest amount of momentum. I play follow the leader with my indicator stock in a volatile market, and don't do anything until the leader says so. Kinda like playing "Simon says."
The rest of the trading is fairly simple, because I know how our leader stock trades in different markets. In a strong market it will gap up a large amount, in a neutral market it will still gap up but the volume will lower; in a weak market it may not gap up at all.
, an electronic commerce company, as my indicator stock because it released news that it expected its second-quarter revenue to be significantly higher than analysts' expectations. I also picked it because it was in the business-to-business sector, which has been hot lately.
The first thing I took into consideration was the overall market of the previous day, which, if you remember, saw considerable selling. With this in mind, I was expecting somewhat the same, as trends tend to repeat until a new one emerges. Traders who study momentum know that the law of momentum is "time and movement." Simply put, this means the greater the movement in the least amount of time, the greater the chance of a change in direction. So when I begin to see buying, I assume the market will change course and head up. But I don't do anything until our leader says it's OK.
Take a look at Ariba, our leader stock, and the Nasdaq Composite chart to see how I played the slaughter. Ariba began the day by gapping up and looking strong, indicating that the market could recover and head back up to 5100. Normally, strong stocks on strong days will only fall about 3/4 to 1 point on profit-taking at the open. If I see them fall more than this, it is an indication the market is getting more selling, and it can be another down day. If this happens, I will start looking for short opportunities on any of the weaker stocks (ones that have good volume but are not gapping up very much).
Ariba fell a bit over $2 right from the open and continued to fall, which put me on "selling alert," and I didn't go long until the selling had subsided. In fact, I didn't go long until Ariba hit its first major bottom at 9:43 EDT (point A in the chart) at 87
it climbed up a full two dollars. Waiting for the indicator stock to bounce $2 allows me to determine the buying demeanor in the market. After the stock bounced from point A and climbed up $2 I went long on a few follower stocks because I expected them to mirror Ariba's action, which they did.
I expected selling to recur in the market because of the initial selling pressure our indicator stock showed and the market looked like it was running out of buying pressure, so I took profits at 96 as Ariba weakened during its climb to 97 5/8 at 9:55 EDT. Had it gone over the high of 99 just after the open, that would have been the signal to stay long in the market.
As I watched Ariba sell down lower and lower, I knew the market would get ugly because -- remember -- I expected Ariba to be the strongest. The Nasdaq had fallen well under 4000 and the blood was flowing in the streets. In addition to Ariba, I was also watching
because of the previous day's buying interest.
When Ariba and JDS Uniphase bottomed about the same time (point B), the Nasdaq was down huge to a little over 3649. Once these two stocks started to show buying, I watched for a $2 climb and then went on a shopping spree and enjoyed one of the most dramatic recoveries I have ever witnessed as the Nasdaq ended the day down only 75 points.
It's not hard if you know how to play "follow the leader."
Some people have interpreted the opening paragraph of last week's
column to imply that I thought
had got the idea for its recent cover story on Wall Street hype from me. That is not the case. What I meant to do was convey my own excitement that one of the lessons I've been preaching for years -- that news creates momentum -- was actually on the cover of
Ken Wolff is founder and chief executive officer of Paradise, Calif.-based MTrader.com, a daytrading and swingtrading Web site. This column provides general information about momentum trading. TheStreet.com has no affiliation with MTrader.com, and no endorsement of MTrader.com or momentum trading is intended. While Wolff cannot provide investment advice or recommendations here, he invites your feedback at