When a stock gaps up and stays above the EMA’s the first 30 minutes of trading, it usually is a good buy when it pulls back to the EMA. But the previous trading day was a large bear trend day, and many times the next day is a small range inside day. On small range inside days, it is usually better to buy stocks that are down on the day, and short stocks that are up on the day, since it is not likely to be a trend day. Sure enough, CLF faded after the first 75 minutes of trading and did not bounce off the EMA.
When a stock gaps down and has continuation like WHR did in the chart below, it usually is a good short when it pulls back to the EMA. But if the pullback has a steep slope, like WHR had, there is too much buying pressure to short it.
Now look at JCP below. Gap down, continuation weakness, and then a very shallow slope that doesn’t even get to the EMA. That’s a stock you want to short for a daytrade.
ESRX gapped up 4.3% on news of a successful completion of its acquisition of Medco Health Solutions. Buying strong stocks when they touch the EMA is usually a winning trade. When the 7:40am PST bar traded over the high of the previous bar, some traders went long, but dailystockplays.com members did not since they know five straight red bars into the EMA is too much selling pressure. The second possible long entry was when the 8:05am PST bar traded over the previous bar high, but again members did not go long here since they saw the flat EMA and six consecutive bars touching the EMA. Ideally you want to see an upward sloping EMA, or a flat EMA that starts to turn up after three or four bars touch it. Six bars touching the EMA is again telling you there are too many sellers around to go long.
RHT had a strong first bar of the day on strong volume and then pulled back to the EMA. Buying EMA pullbacks of stocks with strong intraday patterns and bullish breakouts on the daily chart are usually excellent trades. So why wasn’t RHT today? Four straight red bars, especially when the slope is this steep, indicates significantly more sellers than buyers. And of more importance, no big institutional buyers (i.e. mutual funds, hedge funds, etc). If there were buyers with large orders to fill, the stock never would have fell this steeply. So even though there was a great looking signal bar at 7:05am PST, look how weak the bounce was. Avoid buying EMA pullbacks when the pullback looks like this. Horrible price action!
PANL was strong early in the day and holding above the EMA’s and the previous day high. It tried 5 times to get above $37.75 but the seller just kept refreshing the offer. Whenever you see this and it is an extremely bullish day like this day was (S&P gapped up 10 handles and made no attempt to fill the gap), look for other stocks to trade on the long side. If the day wasn’t so bullish, it would have made a great short when breaking below the box, but since the market was so bullish it is usually best to avoid shorting and find stocks to buy like EW and BID.
CTRP was strong early in the day, and typically stocks that have this strong of an opening drive the first 30 minutes are good stocks to buy when they pullback into the EMA. But look how CTRP pulled into the EMA…4 red bars in a row, with the fourth one the largest. If there were institutional buyers in the stock, the pullback would not have had 4 red bars in a row nor would it have been been this steep. If there aren’t institutions buying the stock, neither should you.
When a stock shows the bearish spike down as LTD did here, it is a candidate for an EMA Pullback Short trade. So when LTD rallied to the EMA and turned lower below the 8:00am PST signal bar, why was it not a good short? Look at the five green bar rally into the EMA. It is too steep of a channel. The shallower the slope of the rally into the EMA, the higher the probability the short trade will be a good one. You also want to see some red bars. Five green bars in a row is just too much buying pressure.
Buying strong stocks that pull back into the 15 or 20 EMA is one of the best trading strategies we use. So why was DISH a trade to avoid today? Three reasons. When a stock drops are sharply as DISH did, the resulting signal bar is larger therefore increasing risk to the trade. The sharp drop also indicates the sellers are significantly overwhelming the buyers. This looks like the shorts covered on the favorable FCC ruling, and there were no real buyers in the market. And the third reason is the range of DISH on the day was already five times the average daily range (ADR). So playing DISH for a continuation move was a trade to avoid.
Learn how to day trade HIG (Hartford Financial Services) when it gaps up and trades below the first bar of the day. HIG had good early volume, but the early pattern was flagged as an avoid long due to the tails on the top of the first three bars of the day. The tails represent selling pressure, therefore increasing the chance of no follow thru to the upside. Even though it bounced off the 15 EMA, the bounce was weak. Why? Because the bounce off the 15 EMA was below the first bar of the day. The stock trended down and ended up closing near the lows of the day. Traders who went long HIG based of the positive news catalyst, positive gap, and positive early volume ended up with a losing trade because they didn’t consider the three selling tails on the first three bars of the day. Our trade finder software warned us of the tails, and we avoided buying HIG.
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