Is Estee Lauder Hot or Not?

In an unfortunate example of our priorities nowadays, a number of websites have cropped up on the theme ‘Am I Hot or Not'. People upload a photo of themselves and others rate them on ‘hotness'.

Looking through charts this weekend, that was the phrase that kept popping into my mind. Some indexes, and many individual stocks, are at a point where we'll soon see just how much interest they can draw. We'll vote with our brokerage website Buy or Sell buttons.

The NASDAQ is at 13-year highs, but seems to be having problems drawing enough fans to break above the 4485 level and make a run for new all-time highs (2000's all-time high of 5132.52 is still 15% away).

Many individual stocks have similar setups. But at least well-formed trading ranges offer good, higher probability trade opportunities.

On August 4th, I pointed out to readers the nice setup Estee Lauder (EL) was offering. In the process of bouncing off the lower point of the trading range defined by the May lows, a good reward-to-risk trade presented itself.

The high probability way to trade a trading range is to enter a reversal off the low side of the range, using a tight stop-loss, and target exiting, or at least making a decision to stay or exit, as the stock approaches the upper limit of the range.

With entry at the open of the 4th at 74.23, EL's high on Friday brought it up to the top of the trading range. The profit of 3.3% doesn't sound like much, but over the 14 days of the trade that represents a 68% gain annualized. In other words, if we could pull one trade after another like this out of our hat throughout the year, we'd end up with something like a 68% increase in our trading account. And this would not be by betting on long term direction or earnings, only short term ‘probability' moves.

Now that EL is near the top of the range, the trader should do one of two things. If the original trade plan was to exit as soon as the stock gets within a percent or two of the top of the range and then exit the position, no matter what, then the stock should be sold (a Good-Till-Cancelled order would have done this automatically). Exiting a trading range play when it reaches the top of the range is the high probability play.

Or you can make a decision at this point. If the stock, and the overall markets, are showing strength, then you can hold on for a breakout of the range and go for higher gains. But this is the lower probability trade. Until a stock proves itself by breaking out, the odds are profit-taking will turn it back from the top of the range.

Don't worry about missing a big breakout move. If you sell near the top of the range, and a breakout occurs, you can merely reenter the trade using a new, tight stop-loss level.

But if you do hold on, calculate a tight trailing-stop exit point. Eight percent usually works well for most stocks as a default, but if there is a logical or obvious exit point that's closer, use that. If you are able to watch prices intraday, then if you see a clear reversal to the downside on the 30-minute charts, exit the trade.

Either way, think about how to minimize the risk on the trade and concentrate on getting your trade success rates up. Steady profits will then follow.

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, please click on the following link: www.markettamer.com/seasonal

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2014 Stock & Options Training LLC

Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.

Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.

Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.

As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.

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