Trading With The Market Trends
By Ultimate Trading
Short Selling Weak Stocks, Index Additions & Window Dressings With Market Trends
In both rising and falling markets stocks can become targets for
shorting as a result of
Shorting is always a stronger strategy during a bear phase, but many
short plays work extremely well in bull markets. In fact, some
shorting opportunities don't even arise in bear markets because many
shortable market trends are the after-effects of buyable market
Examples of this are the reliable market trends of weak stocks
falling after they have run up on moderate news. Let's say the
biotech sector has been hot during the last couple of weeks. Then a
small pharmaceutical firm puts out a news release that its new drug
has passed its trials and will soon go to market. The market's
perception of the news is extremely positive, and the stock rises
30% in two days. Your analysis says that the price wont hold at
that level. So you wait for what you believe will be the stock's
final push upward, short it near the top, set stops to protect
yourself, and wait for the stock to fall.
Stocks like this that rise on news can be traded during both parts
of their journey; long on the way up, and short on the way down.
They're ideal for trading because once you've watched a few similar
situations; you'll get an idea of just how far the market trends are
willing to push them up.
Adding a stock to a major index are other market trends that create
a strong upward push on prices. Mutual funds that track major stock
indexes have to buy any new stock added to an index in order to keep
pace and follow its investment guidelines. The larger the market
trends capitalization of the company added to the index, the more
shares the funds need to buy. The increased buying pressure on
stocks added to indexes tends to drive their prices up, creating a
great trading opportunity.
The market trends may or may not begin to move on the day the index
addition is announced, but it generally starts to move up in earnest
one to two weeks before the addition actually takes place. Once the
stock enters the index, its price tends to fall as traders take
profits. Remember, traders always sell on news. The stock can fall
for several days after it's been added to the index. This allows the
market trends to be traded long on the way up, until the day the
stock is added to the index, and short on the way down, after it's
Mutual funds are the source of other profitable market trends for
traders. At the end of each quarter, mutual funds try to dress up
their portfolios by buying the stocks that have had the best
performance during that quarter. They do this to mislead potential
investors into thinking that the fund's managers are great stock
For example, if semiconductor stocks did well during the quarter,
funds may load up on them during the last week of the quarter so
their "holdings" list will give the impression that they have made
wise trading decisions. It's completely superficial, so it's called
"window dressing." It's possible to make money on these market
trends by buying shares of high performing stocks just before the
end of the quarter to catch the price rise when funds start buying
The flip side of window dressing is that funds often dump their poor
performing stocks, stocks in any group that's under performed during
the quarter, right before the quarter ends. You can try picking up
stocks in under performing
at the end of the quarter, because they'll often be picked up again
during the next quarter by the same funds that just dumped them. The
funds still want the stock, but they don't want to reveal to
investors that they owned so many underachievers, which gives savvy
traders a nice opportunity to profit from the market trends.
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