• Special Report:  How Do I Find a Good Stock Set-Up?

How Do I Find a Good Stock Set-Up? - by Mike Mc Mahon 

Dear Mike...

Question: How do I find a good stock set-up?

Answer:

Hi All: 

It’s me again. I guess I have some time on my hands. You don’t hear from me for 6 months and now I am writing to you again in two weeks. The reason – well, we have been getting a lot a questions from our grads, “Mike, How do I find a good stock set-up?” 

As you know, OTA tries to teach the full spectrum of trading - swing trading, scalping, position trading, investing. However, there are always intraday strategies to try out. Let’s go back to one of the old clichés, “A stock that does not want to go up, wants to go down; and a stock that does not want to go down, wants to go up”. This begs the questions, “when?” 

Relative strength trading is a great intraday play. List a bunch of your favorite stocks on a “Board view” on your platform. Select either the NASDAQ Comp or the S&P 500. These indices move and push the prices around. 

Next, quickly scroll through your stock list and compare it to the index. We are looking for a sharp move in the index and a weak response in the stock – either up or down. Once we see the index rising rapidly but the stock is going sideways or just a little up, well that fits “a stock that does not want to go up”. Thus we have a “Short” candidate. Conversely, as we check and see the index declining rapidly but the stock moves sideways or drifts down, then we have “ a stock that does not want to go down” – here’s our “Long”. 

Now we have to determine the nearest “support” for our short and the nearest “resistance” price for our long. Remember, the “secret” to good trading is “patience”. We now lie in wait. As the short candidate reaches its nearby support, our eyes go to the index. If the index starts to rollover and drop, we open the short with a tight stop loss. As the index falls, our weak stock should start to tumble. (Please note that I am concentrating on “shorts” right now – ‘tis the season!).

What have we done? We have narrowed a long list of stocks down to 2 categories – a long and a short. Perhaps we find 2 of each. Remember, all the other rules still apply, healthy ADV, decent ATR, don’t be playing with Coral Snakes and you should do a background on these candidates before you pull the trigger. 

These are your basic “momentum” trades and will only last a few minutes, but they do work with a high degree of correlation. 

Here is a Stock (LLTC – 1 min, 1 day) that does not want to go down – thus, it must want to go up. As SPX flattens out its fall, we note that our stock has not fallen with it. We draw in a resistance line on the SPX. We then draw in a Support/Resistance line on the Stock. Once SPX (or Futures or Comp) make a move above, we buy long at the stock resistance price ($21.95 in this case). Our stop is no more than $21.90 as this is a short play with a minimal profit potential. We cannot afford more if we are wrong. As SPX moves up, so does our stock. This not a perfect example as you can see the SPX rolling back over, but if you took your profit on the turn over, you would have gotten out at around 22.10. 15 cents on a 1000 shares is $150 less commissions – not too bad for 4 minutes. Again, this is just an example I pulled today for this article (hey, I have to trade too, not just take Pictures). With a little patience and observation, I can (and do) find far more lucrative set-ups. 



Here’s our weak set-up (C-1 min, 1 day, zoomed in). CitiGroup was trending down most of the day. SPX stabilized and so did “C”. We put in our S&R lines and wait. SPX breaks below the 838.50, we look to our stock and try to get short around 29.60 to 29.55 
(we don’t want to chase!). Stop loss should be (again) about a nickel at $29.65. We buy cover as SPX makes a green candle (cuz’ we are chicken!) at about 29.25 to 29.30. Again, a nice move of 30 cents in 7 minutes. Ok, let’s do it again! Now we see SPX flattening out (Green Line). We draw in a Support for C at $29.25 and wait for another breakdown. At 14:01 SPX breaks through. Same routine, we attempt to get short at $29.20 with a Stop at $29.25. Well, you get the point. There’s another 25 to 35 cents available in the next 15 to 20 minutes. 

As always, YOU have to do the work. Don’t try this on just any old stock. Demo trade this technique for a few days to see for yourself; there are no guarantees. This intraday relative strength changes day-to-day and stock-to-stock, depending on news and overall sentiment in the market. Obviously, we can find breakdown candidates in down markets and breakouts in up markets. Are you on the “right side” of the trade?

Check out our other “Lessons from the Pros” – they will certainly help you learn to “see” the Right Side and the timing involved. 

If you are not one of our Grads, then a little of this might not make sense. We are in the education business. Come join us and let us teach you - so it does make sense (and dollars!)

Good Luck and Good Trading, 
Mike Mc Mahon, 
Director of Education