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Stock of The Week: AET

Some people believe that trading and investing are two different things, while others believe that investing in trading strategies is the best way to manage risk in markets that have the uncertainty ours does.  For people who believe that investing in trading strategies is the best way to go, I have a method that I will share with you here, one that you can use on your own to navigate the market no matter what happens to the economy, the debt ceiling, or anything else.  It can also work if the market increases, if the market falls, or if the market trades sideways. PROFIT FROM THESE STOCKS TODAY!

If that's not interesting enough, what if I also said that you could get 0.38% on every trade that strategy made?  This is a tortoise versus hare approach, one that does not swing for the fences, one that is calculated, rule-based, and regimented, but one that has teeth, one that has beaten the market handily over time, and this methodology can be used by anyone because it is based on simple conditional orders that virtually all brokers can handle.  It has had great results when compared to the market as well.  The strategy is called the Stock of the Week.

Stock of the week:

  1. Every week evaluate the market (you can evaluate market-based ETFs too: PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ), SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA), SPDR S&P 500 ETF Trust (NYSEARCA:SPY), iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) on a near-term, midterm, and long-term basis to determine its probable direction in the week ahead.  This means, conduct a technical analysis of the market, based on your findings determine how you think the market will trade, and develop a plan for what you expect the market to do.  Example:  the market will increase to resistance early in the week, stall, and turn down.  That would be a plan where you could short when resistance was tested and take advantage of the downside, but the same thing can work on the buy-side as well, of course (buy at support).
  2. Because you will be doing this every week this next step will be tedious the first time, and then easy afterwards, but in this step we need to find viable trading candidates.  I have about 127 stocks on my focus list, and from that list I evaluate the stocks that are most likely to trade with the market in the week ahead.  Using the example above I would attempt to find a stock that is poised to test resistance if the market tests resistance.  I use stock filters for this, but the analysis is not unlike what we do for the market.
  3. Once the selection is narrowed down to a few stocks, remove the ones that don’t look appealing.  Stocks that are poised to report earnings are automatically removed, we do not like stocks with big news expected in the week ahead that could send the stock flying one way or the other, and we are not interested in penny stocks.  The average price per stock is about $50.
  4. Once we find a few stocks that fit our criteria we should evaluate each one more carefully, take into account recent news and direction, and remove any that do not look good on that basis as well, and then proceed to develop a plan.  Just like we identified resistance in the market, we should have identified resistance in those stocks, and in the process we should also have identified support.  With this in hand we have what is needed to develop trading plans.  Using the example in step 1, the trading plan would be to short at resistance, target support, and stop if resistance breaks higher.  I like to use a $0.25 stop loss for every trade (avg. $50 stock).  Here is an example from this week:  Aetna Inc. (NYSE:AET): Short near 45.59, target 42.95, Stop Loss @ 45.85.  Notice that this is a simple conditional order, any brokerage firm can handle it, but it should be set to repeat as well.  In other words, if stopped, repeat the trade if the conditions are satisfied.  That will also make this automated, so you can go play golf!
  5. Although the profit potential in the trade above is over 6%, we have a rule that says we should secure gains when we have 5% in unrealized gains.  That means the profit potential for these trades outweighs the stop loss risk, but there are more stops than there are profits, as is true with any risk controlled strategy that trades proactively, so expect that.
  6. End every week in cash.  5-minutes before the close on Friday disable the trade, close all positions, and move to cash.  This will allow you to be objective over the weekend when you repeat this process, you will not be tied to market direction, and you will be freer to evaluate the market without bias as a result.  This will keep you going with the flow of the market instead of fighting it, and that is a very important thing during uncertain times.  However, it also allows you to begin every week in cash, fresh, and with a positive outlook, and that too is priceless.

I have been using this exact methodology since December 2007, I know that it can work, and it serves a few very important purposes.  The most important thing it does is that it removes the dependence on market direction from the equation.  That means we can be free to talk about the headlines at dinner with friends, but those headline risks no longer keep us up at night because they have very little bearing on our portfolio.  When it is said and done, using a method like this allows you to say: ‘who cares where the market goes’ and mean it.  During 2008 and 2009, right after we began using this methodology, you can imagine just how important that philosophy was.

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Support and Resistance Plot Chart for

Blue = Current Price
Red= Resistance
Green = Support

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