United Health Group (UNH)

Yesterday, February 28, 2009, presented a trading opportunity on UNH for the downside. The health sector had been pummeled the day before following news about President Obama's plans for health services.

The daily chart shows the weakness with more possible downside to follow:


It has not retested its November lows, and all the long-term charts show weakness. The weekly chart shows the heavy selling, and looking back on March of 2008, one can see the follow through that occurred on such high volume:


Futures yesterday morning were trading below the November lows on the S&P, so it was evident we would see new lows on the S&P and the Dow. For this reason, a put on UNH for follow through to the downside was a trade with the trend. (The trend is your friend!)

Unbelievably, the stock was trading up a few cents in pre-market, confirming the possibility of a good entry. Resistance at 20.64 could be seen on the 2-hour chart:



In addition, a bear flag pattern is working its way across the 2-hour chart...

Furthermore, the daily pivots showed resistance at the pivot point of 20.95. So the entry at 20.60 was a good risk-to-reward scenario.


For a disciplined trade, even though it seems the stock will go lower at some point, the exit was best executed before the end of trading, going into the weekend. This is not a stock I follow regularly, so I believe it is particularly prudent to stay away from 'swing trades' on stocks that are unfamiliar.

The stock did not fall hard, and the 30-minute macd shows the probable reason why:


White macd on the 30-minute chart often seems to keep the stock from falling too hard. In addition, maybe the sellers were exhausted from the heavy selling pressure all week.

Another reason for support can be seen on the daily chart at the beginning of this post. It shows support (marked by a trendline) at 19.50.

It will be interesting to see if there is more follow through next week. I hate to see the health care system go the way of socialization...it will be hard on many of these companies.

United Health Group (UNH)

Yesterday, February 28, 2009, presented a trading opportunity on UNH for the downside. The health sector had been pummeled the day before following news about President Obama's plans for health services.

The daily chart shows the weakness with more possible downside to follow:

Mini Dow (DJX)

Today was a perfect, perfect setup on the DJX to the downside. If only I could trust these setups more often! (Of course, no one wants the market to go down, either, so that can be an emotional block to trading this close to the lows.) I so want this market to rally, but it is not cooperating...

The moving averages went bearish on the 3-minute and 5-minute charts, corresponding to bearish indicators on the 30-minute chart. The target was very clear: the lows of yesterday. So the trade was clearly defined and backed up by bearish internals. The TRIN was above 1.0, which often seems to correspond to more possible momentum to the downside. (The Think or Swim platform is fabulous and has a plethora of information available on measuring and tracking internals.)







The target of yesterday's lows also was wise to follow because it was possible to see a rally off of those levels, which is exactly what happened (but the rally did not hold). Also, the emotional factor of not wanting the market to fall further can cloud judgment, so it is better to undershoot your target rather than get whipped around in the other direction. A little undershooting was in order today, as the lows of yesterday were not quite reached. The Dow came within 17 points of those lows.

McDonald's (MCD)

Yesterday, February 25, 2009, MCD presented a perfect trade set-up to the downside. The 5 moving average crossed below the 30 on the 5-minute chart, and this coincided with the same set-up on the 30-minute chart.





Knowing MCD's support and resistance ahead of time also is helpful. It is important to do your homework ahead of the bell when possible in order to identify correctly these areas. The market moves so fast that reaction time is enhanced by proper preparation. (Now if only I would do this each day!) It is the 'business side' of trading--doing the market research so wiser decisions can be made.

MCD had shown fairly strong support at 54, so this was the proper target for the day. While in the trade, it can be tempting to hold in anticipation that it will trade lower, but wisdom dictates that the target is 54, and it was not breaking this support easily. Therefore, it was wise to stay with the original target and exit, rather than allow a winning trade to become a loser.

Lockheed Martin (LMT)

I really like Lockheed Martin as a company and have enjoyed trading it over the last two years. Yesterday, February 25, 2009, it gave an opportunity for a trade based on long-term support in the 70 area.


Because of this support, it was too easy to anticipate and buy prematurely, as seen on the 5-minute chart. (A 70.73 entry at 10:40, when a better entry would have been when the 5 moving average crossed above the 30.)



Fortunately, LMT gave three opportunities for a profitable exit. The best strategy would have been to set a tight stop at or above 70, and get a better entry later if stopped out. Even better would have been to move the stops up as my initial entry turned profitable.

As LMT rallied late in the day, the 30-minute chart showed potential resistance at 71.80. Once the macd turned white on the 30-minute chart, it seemed it would reach this area, so I began moving up the stops. It is fortunate, as the market sold off sharply in the last 10 minutes. Moving up the stops is a necessary strategy in this news-driven market, and it helps insure profits. Trading with tight stops is liberating and adds to the satisfaction of a job well done at the end of the day.

LMT hit resistance at 72 and promptly fell back. Exit at 71.83 was close to the highs of the day.

The 10-minute chart shows there was more momentum to the last push upward, as the white macd line crossed above the 0 line. The macd indicator is brilliant, and we consider it to be imperative to making good trading decisions.

John Deere (DE)

DE has been one of my favorite stocks to trade over the past two years. It is such a fantastic company, and I admire their commitment to farmers and the environment. The current credit crisis has pummeled the stock, however, and in this trader's market, unfortunately one cannot hold the stock for long. But one can trade it!

Today, February 24, 2009, was a counter trend play based on three factors: after 10 days of downward movement, DE seemed due a bounce. However, one cannot assume in this market environment that something has to bounce. How many times have I said, "It just HAS to bounce!" and then said stock does not!

The other two factors in favor of the trade were bullish internals in the broad market for the day, and a clear monthly trendline which established a reasonable stop loss.

The disciplined trade requires setting a stop when you enter the trade. This guards against making emotionally charged decisions to stay in bad trades, and it requires proper planning ahead of the trade. Setting stops helps to think through the risk and decide if you are willing to accept it, while protecting yourself from a potentially greater loss. I have found that when you set a stop, you are confronted with the reality of what you could lose, and you may realize this is not a trade you are willing to enter. This can be a protection against entering into a trade that is too risky.

In order to trade using proper risk management, one must calculate the maximum acceptable loss in proportion to account size. Protecting capital is the first priority in trading. According to Investools, a fabulous investor education company, acceptable loss is 2 percent of your total account value. So if total account value is $10,000, acceptable loss is $200. In this case, one must set a stop that controls risk at a maximum loss of $200 for the trade.

In the case of John Deere today, I looked to long-term support to find the proper stop, since DE had fallen below levels of recent support (the October, November and December lows in the 28 area). The 10-year monthly chart showed potential support at 26:
So the stop for the day was 26. For a tighter stop, one also could use 26.50, based on a double bottom set on the 5-minute chart. This double bottom in the 26.60 area corresponded to the monthly trend line.

For a disciplined trade, the proper entry also has to be found. A safer entry could be executed using the 5-minute chart, entering as close to the 30 moving average as possible, after the 5 moving average crossed above the 30. This can show that the move has a bit of strength, and this entry proved to be wiser than chasing it on the open, which is often a big temptation. So in DE today, a good entry proved to be in the 27.20 area after this moving average crossover.

Of course, when using the 5-minute chart for entry points, the longer-term time frames must be kept in mind as well.

In this market environment, I have observed that taking quick profits is one way to ensure that good trades do not turn into bad ones! Large gaps down can wipe out nice gains, and they have become a regular event. Bad news in the stock overnight can lead to disastrous gaps down which can stop you out way below your original stop loss price. Even great companies like FedEx (FDX) have suffered recent, huge gaps down of more than $8 which can devastate a small account.

The last thing which one must plan in a disciplined trade is the proper exit! This is one of the most difficult decisions to make in trading. The euphoria of a trade going in your direction can cloud your judgment in when to take profits.

In the case of the Deere trade today, it seemed to me that exiting at 'Resistance 1' was a reasonable exit. That was 28.67, and I exited a bit below this at 28.60. One of my mantras has been, "You can always get back in," but it is imperative to not allow good trades to turn into bad ones!