Ask The Trader
By Steve Pekarek

"Bulls make money, bears make money, hogs get slaughtered." Followers of the arcane art of technical analysis can rattle off many other mantras, including "The trend is your friend" and "Don't short a dull market". They spend hours pouring over charts, looking for breakouts, breakdowns, patterns and reversals, while muttering something about indicators and oscillators - things that you never hear mentioned on CNBC! It's an obscure art indeed. Even the experts often disagree about what a chart is telling us.

Truth is, technical analysis, or TA, can definitively tell us only one thing about a stock: its previous price history. A chart shows nothing about tomorrow's price movement. However, if enough traders are seeing the same patterns and following the same trading rules, TA becomes a valuable weapon in the trader's toolbox.

It's our goal with this weekly column to use it as a training tool, but we need your help. Send us an email with stocks you would like to see diagrammed and/or questions about technical analysis issues. We'll take our best shot at answering them with each Monday edition of our newsletter.

Remember that we cannot answer any personal trading questions. Send your email to traders@splittrader.com

Ok, on to this week's charts:

CAN YOU DEFINE "TRAILING STOPS" AND HOW YOU WOULD USE THEM? ARE THEY A STOP THAT YOU CONSTANTLY MOVE UP BEHIND A RISING POSITION? IF I WERE TO BUY 100 SHARES OF HWP ON A RISING MARKET AT 143 WOULD I USE TRAILING STOPS TO PROTECT THE INCREASE?

GREG

That's a timely question, especially when you see the HWP chart today. They adjusted their price for the Agilent spin-off, so it looks like the stock just crashed. Don't worry, it didn't. The price was adjusted to account for the approximately $31 billion in market cap that was taken out to create an independent company in Agilent (investors now have .38 shares of Agilent for every share of HWP they own, or a cash settlement in lieu of stock.)

To answer your question, we always advise traders to "set trailing stops" to protect profits for short term trading purposes. In other words, if the price moves up, set a line in the sand (or on the chart) that you will sell at if the price begins to reverse. We usually look for intermediate levels that form natural levels of support. I've pointed out a few support levels on the HWP chart below: (I use a real-time charting package to make these charts, there are a number of competing services available).

Now, if a trader had initiated a position at $143 last Friday, (adjusting for the Agilent spin-off) new levels for potential trailing stops exist, because the stock has moved about $9 higher. If the stock moves up again, most traders would consider setting a new and higher stop level.

Good Luck!

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