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Follow me on Twitter @jfahmy
Follow me on StockTwits @jfahmy

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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1) Although the volume on the NASDAQ Composite was higher than the previous day, if you remove the 500m shares that $CSCO traded above its daily average, the overall volume is actually LOWER than Wednesday’s volume.

2) When looking at the other major indexes: the S&P 500, the NYSE Composite, and the Dow Jones Industrials all had lower volume than on Wednesday; another sign that the selling was not severe. As my friend Michele Schneider (@marketminute on Twitter) pointed out, the volume on the $QQQQ $SPY $IWM and $DIA were all lower. These are ETFs that track 4 of the major indexes.

3) The major indexes closed fairly high in their ranges. It’s a sign of institutional support when the indexes open low and make their way higher throughout the day.

4) As another friend pointed out (@CubbieBears on Twitter), the NASDAQ Composite closed above its 10-day moving average; an area it’s held since this rally began on September 1.

5) Many TRUE big cap leaders such as $AAPL $BIDU $FFIV $NFLX held up well today and some of them were higher on strong volume.

6) I say TRUE leaders because I don’t consider $CSCO $DELL $MSFT $INTC leaders anymore. In fact, they have been dead money for over 10 years now. While they are all excellent companies, keep in mind that “Wall Street wants to see growth.” I have no interest in owning any of these companies because they’re simply too big and can’t sustain high growth rates.

7) I always say: “Pay attention to your stocks!” If I only looked at my stocks on Thursday (without looking at the indexes), I would have thought the major averages closed up for the day. Why? Because I finished up for my clients and the majority of our stocks finished positive on the day…once again proving the importance of strong stock selection.

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I know it’s only one day but so far, so good. Your first reaction might be: “But Joe, the Dow was down over 100 points on Tuesday!” My response: “I was paying attention to my stocks and not obsessing over the most over-hyped index on the planet!”

Here’s a quick story: I have a friend who does not trade and has no interest in the stock market. Whenever I talk to him after a big up day, he says: “Wow! I saw the Dow Jones was up 200 points today, you must have had a great day!” And he says the opposite on the big down days. My point is that the average person views the Dow as an indicator of the entire market. 1) DON’T THINK LIKE THE AVERAGE PERSON! 2) The Dow is only 30 stocks and not a great indicator of the other 7,000 stocks 3) Many traders perform well on down market days and lose money on up days. In other words, we don’t always correlate to the indexes.

My main point is to pay attention to your stocks and don’t obsess with the indexes (unless you only trade the indexes). For example, if I only got final quotes on my stocks today and got no index quotes, I would have guessed that the market was relatively flat on Tuesday. Why? Because the majority of my holdings and watch list were barely down and many of them advanced nicely on the day. In fact, my managed accounts finished positive on Tuesday, further confirming the importance of stock selection.

Examples of a few leaders that pulled back on light volume Tuesday: $FFIV $MELI $BIDU $CTXS $CRM $VMW $APKT. Some that bucked the trend and advanced nicely: $NFLX $ISLN $CMG.

So what do we do from here? Watch your stocks. If they are showing you a profit and acting well, try and hang on for a bit. If they break down on heavy volume, lighten up and wait patiently for a better opportunity. As I mentioned on my show, there’s no reason to rush back in and chase stocks. I began to SLOWLY get back in last week by taking light positions and “testing the waters.” So far, my stocks are acting well, but I will cut my losses quickly if they break down. I’ll keep this blog updated later in the week as the market gives us more information.

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1) It is important to keep an open mind and stay on top of the market on a regular basis. If you trade stocks or manage money for a living, you should be looking at stocks on a NIGHTLY basis. Why? Because the market is so dynamic and can change quickly.

2) I am not saying we are out of the woods yet. I’m simply pointing out that stocks are STARTING to look better.

3) If the stocks on my watch list can breakout on strong volume and hold, I would feel more confident committing capital.

4) If the major averages can get above their 50-day moving averages and hold, I would also feel more comfortable. We are close now, but keep in mind this has been an area of resistance for the market lately.

5) Some stocks on my watch list include: $NFLX $APKT $PAY $FNSR $SLXP $CRR $CTSH

6) A few stocks have held their breakouts so far, a positive sign. Examples: $ROVI $PWER $CLB

7) I like how the market ignored the Moody’s downgrade of some European countries on Monday, and also shook off weak earnings from $IBM and $TXN to close higher on Tuesday.

8) The past 12 trading days have come on below average volume, showing that institutions are not participating. I would REALLY like to see volume pick up in order to feel more confident about a sustained uptrend.

Conclusion: I remain cautious, but I am not opposed to taking some light positions to see if this market can prove itself. There’s no need to rush back into stocks. If your small “test” positions show you a profit then, in theory, plenty more stocks will setup and you can further increase your investment levels. If the market continues its recent downtrend, then at least you can get out with a minimal loss. As always, keep an open mind and maintain a watch list of strong fundamental companies building sound technical bases.

Please remember 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 some of these stocks turn against you and the market doesn’t cooperate…protect your portfolio! Thank you. Good luck trading!

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2) Stocks are forming bases right now, but they need more time to set up properly. PATIENCE is so important right now!

3) I wouldn’t be surprised to see the market chop around through July. By chop, I mean 1 day up and 2 days down, followed by 2 days up and 1 day down. Again, nothing “sustainable” to the upside.

4) If you insist on trading, keep position sizes small and take quick profits. If you are not comfortable trading that way, then don’t trade.

5) The key in corrective markets is not to make money, but to protect your capital. As Paul Tudor Jones says: “Play great defense, not great offense.”

6) I don’t think we will have another big leg down, but I’m not ruling it out either. (How’s that for hedging myself?)

7) Keep in mind that cash is a position and there is nothing wrong with doing nothing.

8) I do like how many leaders found support near their 20-day moving averages on Wednesday. Examples include: $BIDU $DECK $CRM $APKT $NFLX $AKAM $CMG. Unfortunately, everyone is watching the same 10-15 stocks and this could be a crowded trade. I like these names but I would prefer to see MORE stocks setup.

9) “Wait until as many factors as possible are in your favor before making a trade. It’s the patience that makes the money.” — Jesse Livermore

Please tune into my show “The Next Big Move” this Sunday night at 8PM EST on StockTwitsTV (http://www.stocktwits.tv/). I will be discussing these thoughts in more detail and comparing the current market to a possible 1997 scenario.

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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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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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I must admit that even though I expected the market to be resilient, I didn’t think that the futures would recover by Friday morning and finish positive by Friday’s close. I thought the Fed news would give the market an excuse to sell off over 2-3 days, and then we could look to buy the stocks that held up well during the decline. Instead, THE MARKET’S ABILITY TO SHRUG OFF THE DISCOUNT RATE HIKE COMBINED WITH THE NUMBER OF STOCKS I SEE SETTING UP SHOWS STRONG MARKET RESILIENCE AND TELLS ME THAT WE MIGHT SEE HIGHER PRICES SOON.

I still expect a “choppy” environment over the next few weeks; however, if more stocks breakout of sound bases on strong volume, I would look to increase investment levels. In the meantime, I recommend keeping position sizes light until the market continues to prove itself. Friday’s strong action is a great sign of the market’s improving health. As always, I suggest maintaining a watch list of stocks that are holding up well and forming proper bases.

My current watch list includes: $GMCR $HGSI $ISRG $NFLX $DNDN $CLNE $TSTC $IPXL $RDWR $CTRP $VPRT $NETL $ATHR $PAY.

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 some of these stocks turn against you and the market doesn’t cooperate…protect your portfolio! Thank you. Good luck trading!

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