The following two videos contain some stocks on my watch list. Please keep in mind that the purpose of this blog is to help people with idea generation. If you trade some of these stocks, PLEASE, PLEASE, PLEASE use stops. In other words, if any of these stocks turn against you and the market doesn’t cooperate…PROTECT YOUR PORTFOLIO! Thank you and good luck trading!

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1) I am finding very few quality setups. Many of the stocks I got stopped out of recently have traded lower, and most of the stocks on my watch list have failed to breakout…all these observations make me cautious for now.

2) When I tweeted these thoughts earlier, many people responded: “You’re in the wrong stocks.” I realize that a few stocks such as $AAPL $GOOG $BIDU $PCLN $LULU $AMZN $GMCR are acting well, but the leadership seems to be narrowing.

3) The narrow leadership reminds me of Sept/Oct 2007 when the market was being driven higher by 3 stocks: $AAPL $GOOG and $RIMM. I’m not saying that we are topping here, but I would prefer to see more “broad-based” participation. In addition, most of the big cap stocks mentioned above are getting “later-stage” in their moves and are extended from proper buy points. Keep in mind that I look for the best “low-risk, quality setups” that I can find.

4) The debt ceiling issue is not a factor in my stock trading. Why? Because after it’s done, the media will find something else to scare us. Remember Egypt, Greece, Libya, the earthquake in Japan, all the nuclear waste that was headed our way, Italy, Greece again, etc. That’s why I pay attention to the price action of stocks and ignore the news.

5) I always keep an open mind and realize that my analysis can be wrong. Therefore, I constantly maintain a watch list of quality stocks. If they begin to act better, I will be ready to pounce on the long side. For now, I remain in 100% cash. If I’m wrong, I’m not worried because I can always get back in.

I suggest being a little defensive and trading lighter-than-normal positions until conditions improve. Keep in mind that I trade with an EXTREMELY defensive posture and I use tighter stops than most traders. I live by the Paul Tudor Jones quote: “Play great defense, not great offense.” Although the major averages are holding up well, my trading instincts are telling me to be defensive for now.

$AAPL $AMZN $BIDU $DIA $GMCR $GOOG $IWM $LULU $PCLN $QQQ $RIMM $SPY

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So, I decided to change my approach. My new strategy would be to trade stocks ahead of key events, take advantage of any run anticipating the “rumor,” and sell the stock PRIOR to the “news.” Key events include earnings releases, shareholder meetings, analyst meetings, user conferences, and sometimes even economic reports. This theory obviously doesn’t work all the time, but it works consistently enough that I have added it to my arsenal of trading strategies.

A real-time example of this happened over the past 4 trading days. I bought $NFLX last Tuesday morning (4/19/11) and sold it Monday afternoon (4/25/11) prior to its earnings release (after Monday’s close). I made approximately 20 points on the trade. Here are some keys to this strategy:

1) DO YOUR HOMEWORK. Find out the EXACT date of the earnings/event. That’s the easy part.

2) CHOOSE STOCKS that are liquid, widely followed, and preferably highly shorted. For example, stocks such as $AAPL $NFLX $PCLN tend to run ahead of earnings reports, and if it’s a highly-shorted stock such as $OPEN $LULU $DECK, the shorts tend to cover prior to earnings.

3) FIND A LOW-RISK ENTRY POINT for your trade. This isn’t so easy as it took me years of trading to work on getting better entry points. In general, it helps to trade around strong technical support areas.

4) HAVE A LOSS CUTTING STRATEGY. No matter what your reasoning is for making a trade, ALWAYS USE STOPS! For example, I got into $NFLX around 233, my stop loss was 228, and my target was 250-255 (a 4R trade). If the trade didn’t work, I wasn’t going to force it or be stubborn about it. I was simply going to sell the stock. As Paul Tudor Jones says: “Play great defense, not great offense.”

5) STICK TO YOUR PLAN AND DON’T GET MARRIED TO THE TRADE. Whether the stock hits your target, your stop, or somewhere in between, don’t risk holding over the event. Simply move on with no regrets. In other words, if $NFLX goes up 30 points after its earnings, I don’t care! Too many times, technical traders start reading fundamental news to justify why they should hold over earnings. JUST MOVE ON TO THE NEXT ONE WITH NO REGRETS AND NO EMOTIONS!

One final point: This is one of many strategies that I use to trade AHEAD of earnings. Sometimes, I will hold a position OVER earnings, but I will save that topic for a future blog post. Again, the above strategies don’t work all time, but they are consistent enough to consider using as a trader.

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When I use the phrase ”define yourself,” I mean decide if you are a trader or an investor. Once you decide, it becomes easier to develop a clear strategy. For example, I defined myself years ago as a “swing trader.” I hold stocks anywhere from 2-3 days to 2-3 weeks and try to take advantage of shorter-term moves. This works for my personality but it might not work for yours. You may find that day-trading is more your style or that long-term investing better suits your personality.

Once you define yourself, you can use StockTwits to help improve your results by following people with similar styles. A great way to find these people is by going to StockTwits.com and typing in the symbols of the stocks you are trading to see what members are also watching the same stocks. Here are a few examples of how StockTwits helped me last week:

1) Idea generation! This is THE NUMBER ONE WAY I use StockTwits. I always love hearing about new stocks because they could be ideas that fit my criteria, but don’t show up on my stock screens. Last week, @zortrades brought $RADS to my attention and @downtowntrader mentioned $ZAGG. I follow these traders because we share similar styles and they bring tons of ideas to the stream. One important reminder: DON’T BLINDLY BUY A STOCK! I recommend filtering the ideas down to the ones that fit YOUR investment criteria. As @alphatrends says: “make these ideas your own!”

2) The Blog Network! On Thursday morning, I almost sold $LULU for my clients at $61 in the pre-market session. Thankfully, @stevenplace posted an article about the options activity around $LULU’s earnings and why he was expecting a short squeeze that morning (click for article). Since his blog post made sense to me, I decided to give the stock room to run in the morning and sold it at $64.50…another example of how the stream helped me increase my profits last week.

3) More Sets of Eyes! On Friday morning (around 10AM EST) as the NASDAQ Composite dropped 10 points, @traderstewie and @OptionRadar pointed out the relative strength in $SNDK. Although the stock was already on my watch list, I was busy watching other stocks and didn’t notice how well it was holding up. These traders essentially acted as an additional set of eyes for me, and helped me get in the stock for my clients early in the day.

I could go on and on discussing all the great traders that I follow and give examples of how they have helped me; However, the main point of this article is to encourage you to utilize the StockTwits Network of websites, and to find the members that share similar investing or trading styles as you. Keep in mind that you have to do your due diligence. It takes time to develop a good network of resources, but trust me, it’s worth working at it!

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1) I never thought the Market went into correction in the first place because I only counted 3 recent distribution days on the NASDAQ Composite. I mainly focus on the NASDAQ because it is THE LEADING INDEX and it’s where the majority of winning stocks come from.

2) I’m not a big fan of looking at distribution on the Dow because I think it is THE WORST index to follow and I haven’t traded a stock on the Dow in over 10 years!

3) Over the past two weeks, I have owned between 14-16 stocks for my clients. That is the most number of positions I have owned in a long time. Other wise traders I know have been on margin recently. My point is there are TONS of set-ups and many of them are breaking out.

4) Examples of strong stocks include: $HSFT $AAPL $FFIV $LULU $SHOO $MEAS $TDSC $CMI $SNCR $CIS $KH $RAX $PAY $CMG. I’m not recommending to buy these stocks here, I am simply showing examples of stocks that are acting well technically.

5) The Russell 2000 is at a new high! How can the market be “in correction” when one of its major indexes is making highs?

The point of this article is not to make fun of IBD because I highly respect their work and I have a few good friends who work there. My point is: 1) Pay attention to the price action of stocks! If solid fundamental stocks are breaking out of sound technical patterns on strong volume and holding, that’s a healthy sign…PERIOD! 2) Do your own work and don’t blindly follow anyone or any publication. Use blogs and newsletters as a guide, but ultimately trust your own instincts.

Of course a few things concern me about the market, specifically the economic problems in Europe and the high bullish sentiment. However, the most important thing to focus on is the price action of stocks…and right now leading stocks are acting well. My best advice from here is continue to find high probability setups, take profits into strength, and ALWAYS USE STOPS to protect your portfolio in case your positions turn against you. Good luck trading!

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I lightened up my portfolio exposure on Monday for several reasons:

1) Low risk/reward right now. For example, starting a NEW position in $AAPL here at $270 would not be wise as it is running into a high probability of a pullback. Of course the stock could “blow-off” from here and run above $300, however I wrote the word “NEW” in capital letters because I am referring to the risks in initiating a new position now.

2) The Federal Reserve meeting on Wednesday. I don’t believe they will say anything drastic, however the market could sell-off if investors decide to lock in profits ahead of the meeting.

3) The put-to-call ratio closed at 0.66 on Monday, indicating a heavy amount of call buying. Call buying is when traders “speculate” that stocks are going to move higher. I like to use investor sentiment as a contrarian indicator. In other words, when the majority thinks one way, “the market tends to fool the majority.”

4) Sometimes there is month-end selling pressure as money managers lock in their monthy gains.

5) By next week, earnings season will be mostly over and there will be few upcoming catalysts.

Again, I am not turning bearish. I am simply recommending locking in some profits, especially if some of your stocks have made strong +10% to +20% gains or more over the past several weeks. Of course the market could astonish people and continue its resilient ways higher, however I feel it’s worth locking in some profits and waiting patiently for higher probability situations. Who knows? They could appear sooner than later.

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This example applies to today’s stock market. Many people are expecting this rally to end any day now, but I wouldn’t be surprised to see the market “fool the majority” and continue higher over the next 3-6 months (with corrections along the way, of course). I’m not only basing this on psychology, but also on the strong market internals. I continue to observe a large number of stocks that are acting well. Specifically, stocks breaking out on strong volume and consolidating on lighter volume.

What amazes me is vast number of sectors represented by these stocks. Examples include: Semiconductors $CREE $AIXG $VECO, Restaurants $CMG $PNRA, Retail $LULU $DECK $SHOO, Machinery $DE $CMI $BUCY, China $BIDU $CTRP, Big Caps $AAPL $PCLN $AMZN, Biotech $DNDN $HGSI $JAZZ, Natural Gas $CLNE $WPRT. The scary thing is that I could keep giving more examples.

Bottom line: I still see healthy signs overall and I continue to recommend being invested in this market. Don’t forget to take profits on the way up keep and, as always, look to cut losses on your weakest performing stocks.

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1) Stocks are acting very strong technically. Over the past 3-4 weeks, I have suggested to slowly scale into this market. The majority of stocks that I recommended have worked out well and they are now either barely correcting or they are pulling back orderly on light volume. Examples include $GMCR $ISRG $NETL $LULU $IPXL $NFLX $CLNE $ATHR $CAGC $BCSI.

2) The major indexes continue to climb on strong volume and consolidate on light volume, a positive sign in my view.

3) The big institutions continue to put money to work. If you are a large mutual fund or hedge fund, your universe of growth stocks is limited. In other words, you have to buy Big Cap stocks with liquidity. Even if you do not trade these names, it is worth observing them to see what the big boys are doing. The price action in $AAPL $ISRG $GOOG $BIDU $AMZN $PCLN $V $GS is very constructive. The majority of these stocks are breaking out or building new bases to possibly break out over the next 4-8 weeks.

4) The stocks that continue to show up on my fundamental and technical screens cover a wide range of sectors showing me that this recent rally is broad based. Examples include: Tech, Retail, Energy, Semis, Restaurants, etc.

5) Everyone seems to fall into one of two categories. They either hate this rally or they are a cautious bull. I would consider myself the latter. My point is that VERY FEW people are in the crazy bull camp and feel this market has any legs left in it. Keep in mind: “The markets tend to fool the majority.”

A word of caution: I realize the markets have had a nice run over the past few weeks. I am not saying to jump in right now if you are not invested because we could see a pullback. If you did get in recently, hopefully you have decent entry points on your stocks and you have “room” to let your winners ride. If you did not get in, don’t chase extended stocks but rather look to buy them on pullbacks to logical support areas. Overall, I remain positive on this market because of the strong signs listed above.

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