The Faraj List of Exploding Stocks Part 3.04 (FAR3)

Beware of holiday 'breakouts'

BOULDER, Colo. (AFX) -- During the last few trading days of the year, many
traders think back to historical precedents and simply believe that a few basic
rules of technical analysis will apply and that they can continue to reap
significant profits as usual.
In fact, this couldn't be farther from the truth.
As this year comes to a close, emotions certainly escalate, volume will
generally taper off, and many fund managers who have most likely closed out the
year by now are either mentally or psychically absent, or both.
With liquidity lighter-than-normal, many securities will trade in a rather
'inefficient' manner and move above resistance and/or below support and cause
emotions to become even more parabolic; thus luring in traders at the most
inopportune time. Would these support/resistance levels have been cleared
during an environment with greater liquidity? Most likely they would not. Only
professionals need apply.
Professional traders understand a few important concepts about the psychology of
retail traders, none more important than controlling emotions. The 'holiday
season trade' involves the hope that shares will rise above resistance and never
look back; however, it is during this time of the year that traders must think
differently and most likely contrary to the normal thought process. Trading
during this time of the year can usually be summed up in one word: Trap.
There are bullish and bearish traps, with the former referring to a stock rising
above resistance and then failing to convert this level of resistance into
support. The latter is quite the opposite, describing price action where shares
fall under support and then this support level fails to act as resistance and
shares rise, instead of fall.
Professional traders generally do not buy or sell breakouts, instead they simply
wait until a security gets 'emotionally overextended' and then they play a move
back into the breakout level. Since most retail traders prefer trading from the
long side, let's dissect a bullish trap.
Case-in-point: EBay, Inc. . On December 15th, shares of EBAY gapped to new
highs of $117.47, volume picked up, and all timeframes were in a nice bullish
alignment. A professional trader quickly notices this strength, realizes that
the previous high was $117.33 and that this level should now act as support if
something "real" is in the cards. Analogous to a tiger stalking its prey,
patience becomes paramount. Smart traders will simply set an alert in their
trading platform for $117.33 and give the stock more time to prove to them its
merit; the professional understands full well that if shares fall back below
117.33 then (a) longs excited on the new highs and gap higher may quickly get
forced out or (b) short-term shorts may enter with little risk, just risking the
days high; thus giving twice the normal amount of selling pressure versus longs
simply taking profits.
As shares of EBAY fall below the $117.33 level, the professional attacks, retail
traders exit and once again the holiday bullish theme falls flat. For most
traders, this is endless frustration. A professional understands this 'grind'
during the holidays and the ability to profit at the expense of bullish traders
simply hoping. Furthermore, the "pro" has a larger wallet and he can whether
"the grind" much easier than the "holiday trader" who has this feeling that his
profits should be immediate and when this immediacy is not rewarded his
frustration grows and his future decision making suffers. Of course, what
generally happens then technically is that shares will retrace down to more
intermediate time frame areas of support and then begin another wave higher as
many previously long entrants watch in amazement.
The moral here is to really be more cynical about price action than normal
during the final two weeks of the year. The holiday season trade can at times
be very tricky and downright deceiving to traders who are enjoying the holidays
and tilted more bullish than normal.
Trading is an exercise in reading the psychology of other market participants
and then profiting at their expense. Everybody cannot win, unfortunately.
Therefore, heading into the New Year begin to think differently and look out for
these bullish and bearish traps If shares do breakout higher and never look
back, professionals will most likely look for other opportunities in the market.
The professional won't chase those movers and neither should you.
Have a Happy Holiday.
This story was supplied by CBSMarketWatch. For further information see
www.cbsmarketwatch.com.