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On Thursday, the Nasdaq lapped slighter higher,
sold off early but then gained footing. This rally lasted until the
mid-day drift and then resumed later in the day. This action has the Nasdaq closing well and
suggests that its recent highs will be challenged.
The S&P also dipped early on before mounting an impressive rally. This action suggests the top of its recent trading range (or base if you prefer), circa 1100, will be challenged. A break above this base would be a major positive. And, of course, a break below it would be a bummer (unless, of course, you are short).
So what do we do? Thursday's action is encouraging. As mentioned above, as long as we can stay above the bottom of the trading ranges, we can continue to nibble on the long side.
Looking to potential setups, tonight's Pullbacks Off Highs List has quite a few decent looking stocks. Stick with the strongest in the strongest sectors such as Neurocrine Biosciences (NBIX).
Example Follow Up
It seems that every time I talk about using volatility, specifically low-volatility situations, I get a lot of questions. Although the concepts can be a little overwhelming at first, I can assure you that they are well worth your effort to learn them. Volatility is essentially "mean (average) reverting." The way to remember this is if you know someone who's normally mean, and they're nice for a few days, chances are, they'll revert back to being mean. Seriously, with volatility, periods of lower-than-normal volatility tend to be followed by periods of higher or more average volatility. Price expands (in either direction) as this volatility reverts to its mean. Think of stocks as resting/contracting, expanding and then repeating the cycle over again. As Connors has taught me, one of the best ways of measuring volatility is by using a 6-day historical volatility reading divided by the 100-day historical volatility reading. This is also known as the 6/100 HV ratio.
Because HV is based on closing prices only, I plotted a close-only chart of Blockbuster Entertainment (BBI), mentioned recently. Notice that the volatility ratio was running below 50% (a). This means that the 6-day HV reading is less than 50% of the 100-day HV reading. Also notice during this same time, prices compressed into a very narrow trading range (b). Remember, volatility does a good job of predicting a breakout but does not predict direction. For this, I turn to my old friend the trusty blue arrow. Notice that BBI was in a strong uptrend (c) before it formed its high level base. Now notice that the breakout was to the upside (d) as volatility began to revert to its mean (e).
Again, I know volatility can be a little overwhelming at first, but I can assure you that it's worth your trouble to learn how to incorporate it into your trading. For more on volatility, see my articles under Trader's Lessons, my book, and/or Connors On Advanced Trading.
Best of luck with your trading on Friday!
Dave Landry
P.S. Reminder: Protective stops on every trade!
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