This is a simple tactic that keeps you out of ER with a knife wound. (June 05, 2012)

by DAN EMC VMW JPM 
Good evening, I’m Dan Fitzpatrick here on Tuesday, June 5th, at StockMarketMentor.com. We’re going to talk about falling knifes today because we’ve got a boatload of them. I talk about a lot of them over in the Premium section at Stock Market Mentor; but here on the free stuff let’s just go through, and frankly the principle is the same. It’s very tempting to look at a stock and say, “Oh, its come down enough.” I kind of joke about this all the time, about the individual, whether it’s you or me; our tendency to look at it chart and say, “Well, I want to step in front of this thing because I think it’s done going down.” Well, we can look and say, look at the folks who thought it was done going down there, and then the stock moved lower. They thought it was done going down here because the stock bounced off the $200.00 day moving average. That didn’t work out too well did it? There’s two different times where you can say, all right there was a move there, actually if you want to look at this, oh it’s done going down, it’s going to go back above the fifty day moving average. Or oh, I know, it’s done going down here; its bounced off the fifty day moving average. Each time, that didn’t work, that didn’t work, that didn’t work, that didn’t work. So now what do we think is going to make this one work this time around? We don’t, I don’t know if you will or not, I just know this; if you defined your risk here, you wouldn’t have been hurt too bad, you define your risk here, you’re not hurt too bad, here, not hurt too bad, not hurt too bad either. The point is, when you’re looking and saying, “I think a stock has gone down enough;” you don’t want to be standing in front of the market. It reminds me of that old picture, I don’t know if you’ve seen it, hopefully you have, otherwise you’re going to think I’m a little bit nuts; that picture of a little rat, you can only see the back of the rat, there’s a big eagle coming in with his claws outstretched, he’s about to grab the rat and the rats flipping the bird to the eagle, and the caption is, “The last act of defiance.” The point is, you don’t want to be that little rat or mouse or gopher or whenever it is, flipping off the market. You have to know that this is a down trend, this stock is in liquidation. But it’s come down so much, it’s at this point where, okay, I could see the stock coming down here and looking to bounce. So we’ve had a big sell off in the market, probably going to start getting a move to the up side. If you want to make this trade make it, but keep your stop right here, right about there. If the stock falls into the red box, if I can get the old red box here, if the stock falls into there; you’re out, you’ve effectively tried to catch this knife saying this is the butcher block and you’re going to make this trade to the upside. If instead, the stock moves into the red box, do not stand there and flip at the bird and say I know that I’m right, this stock has gone down enough and I’m going to move higher. There are eight trading days until the Greek elections; we could very well see continued liquidation in the market including the EMC ( $EMC EMC Corp. ). I’m just using EMC ( $EMC EMC Corp. ) as an example; we can look at VMware ( $VMW VMware, Inc. ), close cousin of the EMC ( $EMC EMC Corp. ), in the same way. If you’re buying VMware ( $VMW VMware, Inc. ) then your stock goes where ? Not below today’s intraday low of $87.84 because yesterday’s intraday low was lower; it’s $87.17 and you don’t want to make it at $87.10. Why? Because it’s 10 cents above $87.00. Not that there’s anything magical about $87.00, but if you’re going to, if you’re going to be playing with pennies put them below the number, not above the number. In other words you can go $86.00 and I don’t know, 83 cents, whatever, just make it below the $87.00. The bottom line is you are defining your risk, that’s the whole purpose of this video, to show you, to emphasize, I’m sure you already know it if you’ve been following these videos for a while, to emphasize the importance of defining your risk. If you can do that, you can make these kinds of trades and you know a lot of them aren’t going to work out. This one didn’t work out, this one, et caetera, et caetera; they don’t work out but at least you’re not going to get hurt that bad in making these trades, and every so often you’re going to catch one and then you get to brag to all your friends and neighbors,” Hey, I bought such and such at the low.” You can do the same type of thing, now that I think about it, with JPMorgan ( $JPM JPMorgan Chase & Co. ). You can look at this and say, “Well, I think it’s done going down.” You can make that trade and it doesn’t cost you that much money to make it. All you have to do is keep your stop right under there. You don’t want to be flipping the bird to the eagle that’s about to snatch you up. Instead, just run for the safety of the sidelines, keep your money intact, Okay, members get over to the Strategy Session; I got a lot to go over and I’ll see you guys tomorrow in the Forum as well as on Power Lunch on CNBC from one to two Eastern.

Free Chart