How to assess and enter a trending stock. Let’s look at Dow Chemical (DOW) (December 15, 2016)
DOW XLB DOW
Lets look at Dow Chemical (NYSE:DOW ), and this is why: This is kind of an indication of where the market is at. We came out of a volatility squeeze here and it sure looked to me like the stock was on a nice upward trend. And then you look here and see that it has paused. We can look at the basic materials (NYSEARCA:XLB ) and they are showing us the same thing. So if you are a real short-term trader you are going to look at this and say, “Oh my gosh! I got to get out of here.” But that is generally not the way to go because what is important to understand is this: This stock traded 6.2 million shares on this day; it takes a lot of money, and that means not you and me but institutions and funds, it takes a lot of money to push a stock like this higher. And that money does not consist of day traders. It consists of large funds that are building positions; they are either buying or selling. That’s where their bias is. I am either liquidating a position slowly or I am accumulating a position slowly. Well how do we know which one it is? Which way is the stock going?
We know here that this is moving higher, so we know that there is a BUYING BIAS in the market. This is the type of thing that you have to look at and say, “Well it is not just going to end on any given day.” If a stock or a sector just goes parabolic, well at some point you are going to get a big whipsaw. Well this is not that. This is just a bit of a pullback here. So we look again at Dow Chemical (NYSE:DOW ), pullback. The point is, you stay long this stock now; because you see that it is still okay it is just pulling back like everything else has been and now that leads us to here.This is a good second chance to buy the stock; because you see the squeeze, you see the pop, you see this two-day drop and now you are buying this stock; because you are of the opinion that we have got a buying bias by large institutions, otherwise the stock wouldn’t be going up. We had a two day little pullback, because that is what just about everything else did in the market, and now we have confirmation that the trend is intact.
And so the way we make this trade is, we keep a stop, you can put it below 57.00 if you want, I don’t know that there is any magical number about 57.00. You can put a stop just below today’s and yesterday’s intraday lows, which are right around 57.42, and you buy the stock right now. So you are in this with about a $1.00 risk. And your assumption is, again, that this squeeze, getting a little pause that refreshes, is going to ultimately go higher. You are not paying much money in order to make that bet; because when you are looking on the weekly chart it is really pretty fair to say that this is a move that COULD just be getting going.
So what we are talking about here is (we will reverse it real quick), if we look at this on a weekly chart, resistance right here, breakout with plenty of upside potential. How do we frame the trade? I have just told you. Uptrend, little two-day pullback, support right here. If we are correct, or I will put it another way, if the market is in accord with our assumptions, in other words, if it does what we think that it is going to do, then we are going to make really good money on this. If it doesn’t and it turns out the market is not in a buying mood, then we get stopped out for a little loss and that is why they call it trading not winning.
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