Yesterday, some traders were bemoaning the swift move down in VRX, an NYSE Pharmaceutical stock. Apparently, they were long as the stock fell throughout the day—an almost 15% loss from Wednesday’s close. It offers a good lesson in day trading stocks.
Day Trading Stocks: Comparative Strength & Weakness
When trading stocks, we always want to assess a stock’s relative strength or weakness compared to other stocks. One way to do this is by a simple comparison with the overall market, i.e., its parent index. It will tell us if the stock is stronger, weaker, or about the same as the overall market. We’ll use SPY, the S&P 500 EFT, to represent the parent index.
As you can see from the charts, recent price action in SPY shows the overall market moving up strongly. This is not true with VRX. The Pharma stock was moving in the opposite direction. In fact, unlike SPY which has been in an uptrend since mid-August, VRX has been in a steep decline for the past four months, falling from a high of 263.81to a low of 88.50 painted about two weeks ago. VRX was significantly weaker than the market.
Day Trading Stocks: Recent Price & Volume
Recent actions shows little buying in VRX. The market did find support at the 88.50 level for a day or two (A), but overall action has been poor. When it had a chance to rally above recent resistance (B) it was checked by supply and immediately reacted on strong volume (C). Sellers are dominating this market. The feeble attempt to rally this stock (D) on very light volume showed little ability on the part of buyers to step in at support and wrestle control from seller. In other words, the inability to rally off of support confirms the dominance of supply. The last day’s activity (E) closes on its low, further confirming the overall weakness in this stock.
Day Trading Stocks: How to Do It
So, how do we use this information to our advantage? Although SPY is strongly up, the markets don’t move in a straight line. There are always pullbacks after a few days of rally. SPY closed at or under the previous two day’s closes (F), showing no net gain after three days of market action and indicating the potential for a down day coming into Thursday. If the overall market is anticipated to be down, we look at weaker stocks as candidates for short opportunities.
Right after the open, VRX headed down with a vengeance, quickly breaking the 88.50 support level. Short sales on the break produced an excellent trade, as the market never looked back. Other short opportunities occurred on the typical noon hour pullback.
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