Hit and Run Trading II Hit and Run Trading II: Capturing Explosive Short-Term Moves in Stocks

HIT AND RUN TRADING II Capturing Explosive Short-Term Moves in Stocks Updated Je Cooper Foreword by David C. Reif, CMT

Marketplace Books Glenelg, Maryland

Copyright © 2004 by Jeff Cooper Published by Marketplace Books, Inc. All rights reserved.

Reproduction or translation of any part of this work beyond that permitted by section 107 or 108 of the 1976 United States Copyright Act without the permission of the copyright owner is unlawful. Requests for permission or further information should be addressed to the Permissions Department at Traders' Library, 9002 Red Branch Road, Columbia, MD 21045, (410) 964-0026, fax (410) 964-0027 This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. While best efforts were utilized in the preparation of this book, neither the publisher nor the author make representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. This book is sold with the understanding that neither the publisher nor the author is engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damage.

From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers.

ISBN 13: 978-1-59280-199-2 ISBN 10: 1-59280-199-4 Printed in the United States of America.

For Bridget

“Jeff’s methods have proven to be very successful. Anyone interested in the workings of the market would be well served to read this book. As one develops more skill they will find themselves going back over the patterns, to reread and relearn the material to better hone their trading. Jeff has truly taken pattern recognition to a higher level.”

— Bill Abrams, former specialist, New York Stock Exchange

CONTENTS

ACKNOWLEDGMENTS FOREWORD Chapter

1

SECTION ONE

xi xiii

OPENING THOUGHTS

1

MOMENTUM CONTINUATION PATTERNS

3 5

Chapter

2

HOT IPO PULLBACKS™

Chapter

3

FLAT-TOP EXPANSION BREAKOUTS™

13

Chapter

4

REVERSAL NEW HIGHS METHOD™

19

Chapter

5

INTRADAY RELATIVE STRENGTH TRADING STRATEGY™

25

6

EXTENDED LEVEL BOOMERS™

33

Chapter

vii

viii Contents

Chapter

7

NON-ADX 1-2-3-PULLBACKS™

39

Chapter

8

JACK-IN-THE-BOX STRATEGY™

45

Chapter

9

V-THRUSTS™

51

ADVANCED STEPPING IN FRONT OF SIZE™

57

10

STEPPING IN FRONT OF SIZE ON NEW HIGHS AND NEW LOWS™

59

Chapter

11

STEPPING IN FRONT OF “SUBSTANTIAL” SIZE™

63

Chapter

12

OFFERING KNOCKOUTS—AN ADVANCED STEPPING IN FRONT OF SIZE™ STRATEGY

67

SECTION TWO Chapter

SECTION THREE MORE REVERSAL STRATEGIES

75

Chapter

13

EXPANSION RANGE DOUBLE STICKS™

77

Chapter

14

BOOMERANGS™

83

Chapter

15

IGUANAS™

91

TECHNIQUES OF A PROFESSIONAL TRADER

97

SECTION FOUR Chapter

16

MAXIMIZING PROFITS WITH TRAILING STOPS

99

Chapter

17

WHEN TO HOLD ’EM AND WHEN TO FOLD ’EM

107

Chapter

18

PREPARING FOR DAILY BATTLE

113

Contents ix

Chapter

19

THE EDUCATION OF A STOCK TRADER

119

Chapter

20

THE BEST OF MY LEARNING SHEETS

129

Chapter

21

CONCLUDING REMARKS

173

CREATING THE HIT LIST

175

APPENDIX

ABOUT THE AUTHOR

179

ACKNOWLEDGMENTS I would like to thank David Reif, my partner at Mutual MoneyFlow Management (www.mutualmoneyflow.com); TheStreet.com for their support and for oering a continuing venue to express my ideas; to Jaye Abbate, Kate Clark, and Chris Myers for all of their eorts in guiding this book back to the marketplace; and to Ruth Roosevelt for her insight.

xi

FOREWORD

It has now been 18 years since Jeff and I met.

The main thing we have in common was that we both have a voracious appetite for knowledge about the markets. I was a broker at Prudential Bache Securities in 1986 when we first met. I could tell you some hilarious stories, but this is not the time for that. I have forgotten the circumstances of our meeting, but we soon became fast friends due to the passion we shared in searching for the “magic bullet” that would make us king of the stock market mountain. I laugh when I think about the hundreds of hours I spent running an Apple II Computer searching for the “ANSWER”. We both read every book that came out about the market and spent hours discussing the contents of them. In the end, we both learned there was and is no magic bullet and that we had to learn to read what the price action was saying all by itself.

In late 1986, after a brief illness I decided to learn how W.D. Gann plotted the swing charts he showed in his books. I read everything he wrote and studied all of his courses, but could not find any “directions” for plotting the chart. Since my doctor ordered me to stay at home, I had the quiet time necessary to figure it out. I was so taken by what I discovered that it changed both my trading and personal life. I began plotting the NYSE Index and the NASDAQ Composite soon thereafter, and watched the behavior of the price chart as I plotted each time frame (Daily, Weekly, Monthly, and Yearly.) I soon learned how one time frame could hand off its message to the other and how price could setup “cascade” moves both up and down. It was my way of discovering Multiple Time Frame Analysis. I soon taught Jeff these

xiii

xiv Foreword new ideas, and he has since taken them to a whole new level. We have since discovered that the principles we learned about the standard time frames work on ANY time frame, including 10 minute bar charts. Jeff has focused on the daily and intraday picture for years now and as a result is now teaching the teacher new tricks.

You know how they say; a ten-year-old dog is really 70-years old? Well, Jeff has at least two hundred years experience reading and interpreting 10 minute and daily swing charts. I can’t keep up with him!

Jeff is one of the only people I know who has made his living trading the markets.

Over the years, he has taken the Gann concepts of the Square of Nine, my Swing Chart Method, and Multiple Time Frame Analysis to improve his own trading.

Through hard work and dedication to his trade, he has developed numerous patterns, which he has described in detail in his Hit and Run Trading books. He has been writing daily comments about the market since 1999 and has been able to catch the majority of the major swings the market has made since that date. Jeff’s approach is unique in that, he does not use the plethora of oscillator type indicators used by most technical analysts. He, like me, believes that the study of price and time is all you need in order to be successful in the markets.

In February of 2004, Jeff became a partner in our money management firm, Mutual MoneyFlow Management (www.mutualmoneyflow.com). We are now putting to work all of those “dog years” of experience in order to improve the returns of the firm’s clients.

—David C. Reif, CMT August, 2004

CHAPTER

1

OPENING THOUGHTS When I sat down to write Hit and Run Trading a few years ago, I had no idea it would have such an impact. I knew there was a lack of information available for short-term equity traders. I did not know that so many thousands of traders were craving this information.

I have heard the good and bad about my first book. The bad stemmed predominately from the few people who hoped to turn $5,000 into millions. That is never going to happen with my strategies. The good came from the many traders who have taken the strategies and grown their accounts. An extreme example was told to me recently by a senior executive at a major discount brokerage firm. He stated one of their customers, using only one strategy from the book, has grown his account from $30,000 to over $300,000 in 24 months. This performance is astounding and I could only hope for it to happen to me someday!

Hit and Run Trading is about momentum trading. It is about climbing aboard strongly trending stocks in order to make fast profits. It is also about taking very small risks.

This is done with tight protective stops. Recently, Gary Smith from TheStreet.com traded my method and stated in his review: Je’s come up with a winning methodology. He only takes a position if momentum reasserts itself and while the maximum loss he incurs is 1 point, the maximum profit is unlimited. Stack those odds in your favor and you should get exactly what I found: more wins than losses, and the average win being greater than the average loss.

1

2 Chapter 1 Gary is exactly right in his analysis. By risking small amounts in order to hopefully make larger amounts, the odds do get stacked in your favor.

Hit and Run Trading II is an advanced version of the first book. It is a culmination of patterns, concepts, and trading techniques to make you an even better trader. I have broken the book into four sections. The first is the largest as it contains trend continuation patterns. These are specific setups that occur in strongly trending stocks.

They are meant to be used for either day-trading or to be held for a few days as a move plays itself out.

The second section contains, in my opinion, the most powerful day-trading strategies ever published for equity traders. In it, you will learn three advanced strategies to what I consider my best trading method, Stepping In Front Of Size™.

The third section is made up of short-term reversal strategies for you to focus on.

Reversals on momentum stocks come quickly, and these strategies allow you to pounce on stocks as wrong-footed traders run for cover.

In the fourth section, we will look at various techniques to improve your trading even further. Stop placement, carrying positions overnight, trading technology, etc. are just a few of the concepts I will share with you. I have also included an interview of me and more than 40 actual learning examples taken from my daily trading service. All combined, I hope to share with you the many aspects of successful trading.

Now, let’s move on to the first section.