Stocks For Trading

Maximizing trading opportunities during the S&P Index Futures can be done by trading in stocks that have close price correlation. This entails opening two different accounts – one for equities and the other for commodities – as they are traded at separate exchanges. Both can be carried out electronically, but come with their own set of margin requirements, regulations, and commission structures.

At the start of each year, I identify ten high-performing stocks that I will trade for longer-term investing and short-term day trading.

WINNING AT DAY TRADING

As a trader, I look for stocks that will trade best with the S&P 500, Dow 30 Industrial Average, and Nasdaq 100.

Once I have chosen my stocks, the next step for me is to study them. This does not merely involve taking a look at their fundamental analyses of earnings, P/E ratios, or cash flow. Instead, what I do is observe the stock and analyse its price action relative to that of the S&P 500. What patterns exist? Does it move similarly to the S&P during certain times of the day or year? There are some stocks that track almost exactly with the S&P as well as those which usually follow a similar trend but may display discrepancies during periods such as opening or closing sessions. To feel comfortable trading a stock, I carefully observe and learn about it for at least one week before putting on any sizeable positions.

I commonly trade three index stocks – the QQQQ, theDiamond, and the Spyder. These are similar to a mutual index fund with the QQQQ pertaining to Nasdaq 100, the Diamond focusing on Dow stock, and the Spyder tracking S&P data. By studying resistances and supports of indexes, it is possible to gain knowledge of stocks. If S&P breaks resistance then you can buy Spyder or sell it if support is overcome. The QQQQ is my favorite choice due to its response rate to ten points in Nasdaq – usually 0.25 points in corresponding direction (like from 1543.00 to 1513.00 which would be an approximate drop of 0.75 for 1000 shares resulting in $750.00 profit).

There are two major advantages to index stocks over common stocks. The first is that there is no uptick rule. The trader would need to see IBM’s stock price tick up before he could short sell 100 shares at the market with common stock, such as IBM. The trader receives a profit right away if he or she shorts the stock at the market, since the order is filled immediately.

It is true that economic news affects the entire market, but individual stocks are more vulnerable. Index stocks do not have earnings reports and CEOs do not get fired. If there is an SEC investigation or poor earnings, an individual stock may drop 10 percent or more overnight. Therefore, they are not as susceptible to many factors that affect individual stock holdings.

My stock picks are based on both the strength of the sector and the stock’s historical performance. Among the stocks that have consistently been on my list are General Electric (GE), Flowers Industries (FLO), Apple (AAPL), eBay (EBAY), Exxon Mobil (XOM), Amazon (AMZN),

Microsoft (MSFT), IBM (IBM), Intel (INTL), Wal-Mart (WMT), and Adobe (ADBE). I generally stick to large caps, except for companies listed on the Nasdaq. I want a stock that trades at least 4 million shares per day and has an average true range of $1.00. Especially for day trading, this is important since I need to be able to get into and out of the market quickly, and the stock’s price needs to move within a reasonable time frame.

It has sometimes happened to me that I buy the same stock both for long-term investing and day trading. In other words, I will day trade a stock, but I will also buy shares of the same company and hold them for the long haul.

Stock investing

To begin, I identify ten high performing stocks. I note their opening prices, follow the stock price, and record all the weekly openings. I do not purchase a stock until it reaches its yearly open; I do not sell it until it reaches its yearly open.

WINNING AT DAY TRADING

I analyse daily and weekly charts in order to identify support and resistance levels. I only execute trades if the stock’s price crosses these points. Specifically, when a stock is trading above its yearly open and I observe the next resistance point, I wait for that resistance to be breached before purchasing the stock, with the aim of holding it until the succeeding resistance point is attained. The same course of action applies when shorting a stock, however this time I am looking out for support to break, while also ensuring that the stock must be trading below its yearly open. When support breaches, I will then sell off my position and wish to remain short until reaching either my profit target or the subsequent support level.

Market direction is determined by the major futures indexes. I look at the S&P, the Dow, and the Nasdaq to determine whether the market is going up or down. I shorted Research In Motion recently on the falling S&P Futures. Figure 9.4 shows how I sold for $84.00 and rode it all the way to $63.00.

Stock day trading

In the previous section, I identified stocks with strong correlations to the S&P 500, and those are the stocks I like to trade. IBM historically has a close price correlation, as shown in Figure 9.5.

The pivot charts in Figure 9.5 indicate that IBM mirrored the S&P’s action. Knowing this, a trader could have shorted IBM ten points even if there had been poor earnings news that sold it off. The short sale of IBM after it broke 100 would have yielded 20 points, or $2000 for 100 shares of IBM shorted from 100.

While IBM mirrors the S&P, other stocks move in a contrary manner. For example, Coca Cola Co. (KO) tends to go down when the S&P goes up, and vice versa (Figure 9.6). In addition to Anheuser Busch (BUD), you can find other stocks that move similarly to the S&P 500 movements—either with it or against it.