Regaining Momentum With Microsoft

Analyzing one stock's movements can help you get back into the swing of the market after a break.
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Coming back from vacation is hard for any worker, but especially difficult for those who follow the market.

I spent my last vacation deep in the woods with no radio or other form of outside communication, but had to be prepared for trading the Monday I came back to the office. I had no idea whether the market was down to 1200 or up to 2000.

In order to help my fellow post-vacation victims, this week's column will explain how I prepare to get back into the swing of the market.

Before I left,

Microsoft

(MSFT) - Get Report

was my key market indicator, accurately reflecting the market's moves. So upon my return, I looked at a one-minute chart of Microsoft for Monday through Friday, focusing on time and value. I had to get a sense of the patterns to the recent buying and selling that would reveal how much average potential we had been seeing, and also when that potential might occur.

First, when considering a stock's movements during the week, news-driven trading should be discounted. I may or may not know the exact news events that affected the market at certain times, so any unusual moves, I discount as news-driven. I'm looking for patterns of consistency in the average moves, because consistency is a trader's bread and butter. One-time events can have tremendous potential, but you need to seek the advice of a good psychic to trade them. Instead, we look for the average reactions given the current market.

Let's look at Thursday's trading. Here is a three-minute chart that shows the entire day. (I usually use a one-minute chart, however, for a more exact sense of the action.)

Thursday, Microsoft Shows Only a Modest Gap Up

The gap was slightly up, implying positive momentum, but not enough to create any significant profit-taking pressure from the open. We saw the positive momentum continue, with early buying to the tune of about $1. However, by 10:30 a.m. ET, the initial selling price was higher than $2, which indicated increasing weakness. Had I been trading Friday, that increase in weakness and market change would have made me consider shorting.

Now let's take a look at Friday.

On Friday, Mister Softee Gaps Down

The gap was down, so I would have expected early buying due to the extra value created by that gap. Indeed, buying occurred during the first few minutes after the market opened and the stock went up again about a dollar. Now, let's look at the selling. By 10:30 a.m. ET, early selling was only about a dollar, too, but the early high was never exceeded. Plus, we saw the increasing weakness that Thursday's trading hinted.

By studying the charts through the week, you form an idea of your indicator stock's potential and you can apply that potential to your basket of regular stocks, which participate closely with the market. So on Monday morning, when I began to prepare my traders, I looked for an early climb with Microsoft and the market, to the potential of about a dollar. That dollar of early potential on the first climb was a common denominator for both previous days. I also expected roughly the same time frame for the buying and selling.

While on Monday, Buying Develops Slowly

Monday, we had another gap down and early buying, but we were hit with a market change during early action. I looked for at least a dollar on the first climb, which the market exceeded. The buying worried us because it took much longer to develop than I expected, but that delay allowed the slower traders to enter and, as a result, we did well.

The point is to track common denominators in action. Patterns repeat themselves, but they often are subtle. Sometimes, it is hard to rely on them. But a patient and careful eye can discern them.

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 you to send your feedback to

Ken Wolff.