This column was originally published on RealMoney on July 20 at 12:31 p.m. EDT. It's being republished as a bonus for readers.

Profits can be hard to come by these days, but I really can't complain. I've been doing quite well since I sat myself down in May and keyed in a few adjustments to my trading strategies. My strategy has been to take profits out of the market as they come, and the frequency with which I've had to do that since adjusting my strategies has been a pleasant surprise indeed.

My efforts have convinced me there's money to be made in 2006, as long as you keep an open mind and are willing to try out new things. To this end, let's review five market strategies that are working well despite world tensions, interest rates and general malaise. Hopefully these ideas will help you rediscover your profitability in this difficult environment.


Let's start with the obvious. The Market Volatility Index, or VIX, is near a three-year high. This translates into the most favorable daytrading environment in many years. Of course, a fair share of readers don't have the time or skills to play the financial markets by flipping stocks repeatedly during the trading day.

An equal number do have the time, but haven't jumped into the scalping game because they're hoping the 2006 market is just a bad dream. Unfortunately, these tough conditions could persist for months, or even years, so if you've always wanted to try your hand at daytrading, now is the perfect time.

Overnight Flips

We're seeing few trends that last more than several hours or days. You can take advantage of these choppy swings by assuming a position near the close of one session and dumping it into the next day's open. It may sound scary, but astute observers of market psychology can predict the next day's action with relative accuracy.

My favorite overnight play is to buy stocks on Friday afternoon when folks are worried about macro events triggering a Monday selloff. History shows that most of these paranoia bouts turn out to be unwarranted. Of course, Black Monday could come at any time, but probably not next week or next month. In the meantime, jump in and take your shot at weekend flips.


Why does it always seem to be too late in a selloff to take new short positions? The reason is that most of us are hardwired to see upside opportunities more naturally than downside profit-makers. The good news is that you can be late to the short-sale game and still make considerable money. The trick is to pick your plays very wisely.

In particular, it's best to avoid high-beta stocks that every other trader chases on the short side. These include the most popular tech names in obvious downtrends, such as Palm ( PALM) or Marvell ( MRVL). Instead, focus your full attention on lesser-known short plays that show more reliable price action.

For example, many chicken stocks show excellent shorting patterns because of growing paranoia about avian flu. Sanderson Farms ( SAFM) dropped through support about two weeks ago and took a dive before starting to bounce earlier this week. This countertrend rally should fail before the stock gets much above $27.25. That level would make a good short-sale entry for a continued decline toward the low $20s.

Cigarette Stocks

Tobacco companies did a major turnaround after Altria ( MO) won a big court case in Florida a couple of weeks ago. These anti-social issues are now among the few stocks these days that show legitimate breakouts. The good news is this sector usually outperforms during recessionary periods, even without supportive news.

I'm currently long Reynolds American ( RAI), which just declared a 2-for-1 stock split, but I want to look at Altria because of its popularity. I considered the stock dead money when I examined it in early June . That changed when the Florida Supreme Court issued a favorable decision on a key case earlier this month.

The news triggered a vertical rally that lifted the stock to its December high of $78.68. Price stalled at that level, where it has been consolidating in a bull flag pattern for the last two weeks. This orderly pullback finally should yield a strong breakout to new highs in the next one to three weeks.

The measured move target for this breakout lies in the upper $80s. But trading any tobacco stock should come with an investor health warning. There are still so many legal actions in the courts that unfavorable news could come at any time and undermine the rally. But that's an acceptable risk, considering what's happening to the rest of the market.

Weekly Charts

Last week , I showed a few of the advantages of trading off weekly charts instead of daily ones. The favorable response to this column suggests that folks are taking the advice seriously. But how do you get started on this noble enterprise, and how often must you track key developments in your weekly stocks?

Start your weekly watch list with components of the S&P 500 and Nasdaq 100. These liquid issues show reliable long-term patterns, and you can follow the news flow on them very easily. Then take the time to peek at longer-term charts in all new issues that attract your interest. Add these when something good catches your eye.

Weekly charts are designed for folks who have real lives outside the financial markets. A weekend review of news and price developments should be sufficient to manage positions and find new opportunities. But also add a free alert service that sends you key headlines on your stocks during the trading week. This will let you respond quickly if something unexpected happens.
At the time of publication, Farley was long Reynolds American, although holdings can change at any time.

Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from

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