In Holiday Trading, Expect the Unexpected

This article appeared first on RealMoney.com on Dec. 23. To read more from David Baker and the other RealMoney columnists, click here for a free trial.

With one holiday this week and one half-session, trading is likely to be very light, but that doesn't mean there's not opportunity. Here are a few things I do in light trading weeks.

First, I lower my expectations a bit; I feel that there will not be as many trading opportunities during a holiday week. Something that a lot of traders talk about is forcing trades. That means, even though a setup is not good, sometimes a trader will get into something that he knows he should not, just because he cannot find anything else.

Second, I expect there will be more unexpected moves than normal. A good example is when a stock just drops quickly for no reason on very light volume and then rebounds. When I see this happen, especially to a stock I am in, I try not to overreact and just hit the buy (or sell) button. Certainly, there are some situations where you just have to get out, such as big size coming in to sell. Yet a quick snap in one direction can also result in a rubber band type move in the other. Consider checking your daily chart for near-term support.

Caterpillar

As you know, I am always looking for a nice simple consolidation pattern to watch for potential trades. It looks like Caterpillar ( CAT), the world's most famous heavy machinery company, might just do the trick. For the last two weeks, the stock has been caught in a range between $44.50 and $46.50, with a potential stop near $46.25. How do we play this? The beauty of the consolidation is that it is such a simple clear pattern. Buy low and sell high, that's the plan. I like to set my alerts about 20 cents away from support and resistance (which I've listed above).

One thing on this chart that has my attention is that the volume has either been declining or idle during most of the consolidation. On Friday, the volume was about 50% greater than it was during the last week of the consolidation. This could mean the stock is going to breakout on Monday, or it could mean this high volume up-move suckered in some buyers and it will turn at resistance. If the stock moves higher, I'll still watch for the short move. Of course, if the market is really strong, I will be extra cautious.


Fred's

Fred's ( FRED) is a discount store, operating around 353 locations nationwide. The stock has been in a fairly steady downtrend for the last few weeks. On Friday it broke the downtrending channel highlighted on the chart on nearly 1 million shares -- twice the average volume for this stock.

At this point, I think it would be prudent to watch for two types of moves. The first is the continuation move on the long side. This means that if it breaks Friday's intraday high, it could continue higher. Of course, my preference is to watch for the failure. This would mean that the stock would hit resistance from a little while back and then turn south again. In this case, I am setting my alerts for potential failures at $26.80 and $27.40. The first level has not proven to be resistance, so it's for the more aggressive trader. Personally, I would probably wait for the second level.


Having traded this stock numerous times, I know it can move quite quickly. This is another name in which I will reduce my normal position size when making a trade. I find that it is not often quoted very heavily, meaning that it can move far on only a few shares. Certainly on a day where it trades double its average volume, it has many more traders in the stock. But in general, it's a fast-moving name that you should study a bit before just jumping into. Another thing to keep in mind is that if you put in a physical stop order, when it becomes a market order, it might not fill you where you expect.

Happy Holidays.

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David Baker is a professional trader and the CEO of The Capital Trading Group, a company that trains and helps to fund individuals interested in trading for a living. At the time of publication, Baker did not have any positions in any of the stocks mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback.

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