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The Secret to Profitable Day-Trading

By Jeff Clark
Thursday, November 30, 2006

If you want to make fast money day-trading stocks and options, then you have to pay attention to Merrill Lynch (MER)...
 
Day trading, like skiing the double black diamond slopes, is risky business. Most beginning traders are better off on the bunny slopes.
 
But every once in a while, the slopes are groomed, the skis are waxed, and the conditions are just so perfect that you have to point your K2s downhill and just go for it. And on days like that, MER will guide you safely back to the lodge.
 
MER is a near perfect barometer of the strength or weakness behind the market’s daily action. For example, if the stock market is up or down strongly, then MER will be up or down strongly as well. On the other hand, if the market is moving higher and MER is weakening – or if the market is moving lower and MER is gaining strength – then it’s time to pivot, cut the skis into the hill, and head off in the other direction.
 
Yesterday was a perfect example...
 
The Dow Jones Industrial Average gapped up 50 points on the opening, and MER opened at $90 – up $0.41 on the day. But as the market tacked on another 35 points, shares of MER started falling back. The rally was on thin ice, and the Merrill Lynch December 90 puts (MERXR) – which were trading for $1.50 – looked perfectly groomed and ready for a good run.
 
Two hours later, MER was down $1.00 on the day, and the overall market’s gains were cut in half. It looked like stocks were about to fall off a cliff. The market was still falling, but MER began to strengthen. Time to pivot, cut into the hill, and sell the MER puts for $2.20.
 
A 47% gain in a matter of hours is a pretty good day on the slopes.
 
By the end of the day, MER had rallied back to unchanged, and the Dow closed near its highs.
 
I can’t explain why MER is such a good barometer to gauge what the overall market will do. I also can’t explain how a spark plug starts a car. But when I turn the key in the ignition, I know what to expect. And, when I see MER moving in the opposite direction of the overall market, I know the outcome there, too.
 
And here’s what’s really important...
 
MER is also a terrific barometer for the intermediate direction of the market. Based on the looks of the following chart, there’s a storm coming in...
 
 
You can see how MER broke down from a bearish rising-wedge pattern back in April. And you probably remember the correction that pummeled the stock market in May.
 
MER is once again on the verge of breaking down from a rising-wedge pattern. Perhaps it’s time to pivot, cut into the hill, and look for fresh powder elsewhere.
 
Best regards and good trading,
 
Jeff Clark




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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%