The Wrap 11/2/10

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Steady support gave stocks strong gains Tuesday, but resistance capped the climb. After the close ASIA, CECO, CTRP, ERTS, EXM, HIG, HTZ, LNC, PEET, RLD, STEC and TGI were the most notable names that reported. I will be so glad when earnings are over.

Futures are higher after hours: S&P 500 futures are +3.13 from fair value of 1189.97 and Nasdaq100 futures +3.63 points from fair value of 2148.12.

All ten sectors were in positive territory, led by utilities (+1.2%), consumer discretionary (+1.1%) and energy (+1.1%).

Tomorrow morning before the open, three economic reports are scheduled to be released: 1) MBA Mortgage Applications (Consensus NA), 2) Challenger Job Cuts (y/y) (Consensus NA) and 3) ADP Employment Change (Consensus 23K).

Tomorrow before the open of the many companies scheduled to report, some of the bigger names include: ABFS, AET, WLP, ASCA, AOL, CVS, GRMN, MGM, TAP, PHM, PWR, Q, TDW, TWX, and WLP

Housekeeping

I made an error last night on the p&l, most of you know that I lowered the entry price for ISLN to 28.70, but I neglected to lower the stop, I believe it was listed as 28.40, which as you know was pretty tight and was in fact an error. If in fact you got stopped I apologize. The stop should be 28. My bad, my goof.

Stops

l thought it would be a good time to discuss STOPS as the question has come up in some recent e-mails.

Hard Stops– a hard stop is just that a hard stop. It means that no matter what, you are out of the trade at that price.

Soft Stops-a soft stop implies some leeway at the area of the stop. If the stop is $42, maybe you give a little room. This distinction is important and it really depends on you and your tolerance for risk. My audience is composed of maybe 65% swing traders and the balance are very short term day traders, some of you trade in the foxhole every day and some of you trade with conditional orders with your brokers as you have careers in other areas.

I try my best to satisfy everyone, but I do realize that every one of you have different styles, risk perimeters and needs. I use mental stops as I am trading full time and am a professional trader, most of you day traders probbaly do the same. If however you are strictly a swing trader and put in stops with your broker at the same time you buy the stock, you should probably continue to do so.

I get a lot of questions about stops during te first 15-20 minutes of trading. I am a firm believer in NOT taking stops during that period of time as the market is extremely “reactionary” during that period as positions are getting squared, and institutions are jockeying for position. It is the last place you want to be unless you are expert at trading pre-market or the opening minutes.

The only time I usually use the opening, especially gaps up or down at that time is if I am long or short and I use the gap to exit a position, for that, the gaps are a good thing. Below are two examples today of why you would not want to panic and get stopped in the opening minutes.

FMCN
FMCN

There is no “holy grail” of trading , but these are guidelines that have served me well for over 20 years and I want you guys to be able to avoid some of the mistakes I made when I started trading. This market, although in an uptrend, can be treacherous, just look  at what happened today with CML, a beautiful chart, it was breaking out, then broke down on news and stopped us out. We don’t get many of those vicious reversals, but we got it today.

If you have any questions about this topic, or others, please feel free to email me. I hope this was helpful.

I removed AAPL from the list as it gapped up through my price, but we will look to revisit it on a pullback. tomorrow is a big day, as we see more earnings, the Fed speaks about QE2 and the election results will be in the bag. Don’t forget we get the big employment figures on Friday. The chop will hopefully stop soon as we get some direction higher or a new trend lower.

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