About the Sympathy

Citation from Traders-Talk

"At first blush, “sympathy” is an oxymoron when applied to the market, a cutthroat institution that has little sympathy for anyone. But when it comes to trading, the term makes sense.

A perfect example occurred a week ago when OSI Pharmaceuticals (OSIP) announced before Monday’s open that it was getting very favorable results in late-stage testing of a cancer treatment. OSIP was up 40 points at the starting bell, doubling in price. The excitement quickly spread to other biotechnology stocks engaged in the fight against cancer. Genentech (DNA) and ImClone (IMCL) gained 10% in a flash, and there were many other winners.

All too often you cannot buy the stock announcing good news because it is going to open well above the previous day’s close. Savvy traders want to avoid a “gap trap” in which buyers miss most or all of the early move and are trapped in a declining stock when sellers emerge to take their quick profits.

The sympathy play is to pick up shares of other stocks in the sector as they begin to attract attention after the open. The same goes for short sales. When a sector leader takes a hit, look for others showing weakness in sympathy. Obviously, knowing the key companies in each sector is important.

Another approach is to grab some shares of an Exchange Traded Fund (ETF) that includes the stock making a move. Remember, ETFs are baskets of shares that mirror the action of a particular index or sector. They are organized like mutual funds but trade like stocks.

If Intel (INTC) is pushing up the chip sector, you can get into the Semiconductor HOLDR (SMH). If Home Depot (HD) is getting trounced, there may be profits via shorting the Retail HOLDR (RTH).

But don’t overstay your welcome in these trades because most sympathy plays are relatively short-term phenomena and the excitement leaves within a couple of days.

TIP:

If a stock is testing a resistance level, it will certainly help to have the "market" behind you when you are looking for the breakout. Remember that in day to day life, sector strength
and overall market "tone" is the most important aspect of trading. In other words
if the DOW is down 100 and the NASDAQ is down 50, what are the chances XYZ is
going to bust through that resistance level and run? Not much really. On the
other hand if the DOW is up 125 and the NASDAQ is flying, XYZ very well could
squirt through that old resistance and make a great move higher. So, paramount
in trading chart patterns is to try and align a great chart with an "up day".
This will greatly enhance your chances of scoring home runs! (IMO) . "