Emotional Extremes at Play With Baidu

Last night I was chatting with a friend of mine who trades commodities. He's not a professional trader, but he loves trading the silver market. We were talking about Thursday's big swings and he commented about how he could relate to the pain that a lot of traders were probably feeling in light of the dramatic strength the market has been enjoying for the past couple of months.

I asked him to explain, and he told me about his metamorphosis as a trader. He said that when he first began trading the silver market, he'd start with just one contract. When the market started moving higher, he'd buy more ... and more ... and more. He'd start getting excited about the trade, fixating on how much money he was going to make. He'd run the numbers in his head, calculating his expected profits.

Finally, the market would reverse just as he was at his peak buying. Now, his excitement and greed gave way to concern ... then hope ... then despair. But he'd try to hang on because he understood that markets go both ways. But his position was too big, so he'd wind up getting scared and sell ... just before the market reversed to the upside once again.

I asked him whether he was still dealing with this idea of being greedy right at the top, and then fearful right at the bottom. He admitted that he still deals with it on occasion, but that his biggest lesson has been to focus on the entry.

He said, "If I buy when it doesn't really feel like I should be buying, then I'm already long when the price starts running. And since I'm already long when the price is moving, I'm thinking about protecting what I've already got rather than counting the money that I have not yet made. That way, I feel really good about selling, even though silver is still running up because I know I'll have the cash to buy it back when it falls back down. I think that's what the pros do, isn't it?"

I said, "Yep. Not always, but that's the idea."

Are you still stuck in the rut of being excited and greedy right at the top and being fearful and panicked at the bottom? If so, try doing the opposite of what your instincts are telling you to do. You might make more money.

Let's look at some reader requests.

Baidu was on everybody's screens today, trading 20 million shares. That's a lot of shares changing hands between $300 and $350. As such, the most prevalent emotion in the crowd right now will be found at the extreme edges of this range.

If the stock falls below $300, Thursday's dip buyers are likely to run for the exits and put pressure on the stock. At the same time, those who sold Thursday are not likely to jump back into the fray without some serious reservations. So I'd watch the 50-day moving average for the next potential buying opportunity.

And be mindful that the stock could either fall down to the 50-day moving average or just mark time until the 50-day moving average finally rises up to meet it. Either way, I'd focus on this key moving average if current support breaks down.

Thursday, I featured Men's Warehouse as a short idea. This one worked like a charm, as the stock gapped below support, rallied very briefly, and then just kept going falling. But the May low is right around the corner, so I'd be covering that short now. No sense holding a position like this open any longer than necessary. After all, the stock got oversold in a hurry! It's time to take some off the table.

Like most retailers, Coach is showing some prolonged weakness. The stock broke above established resistance at $37.50 last year. But the stock looks like it's going to retest that level. I'd wait until then before buying.

NutriSystem is just a broken stock. After gapping down about $12 last week, the stock hasn't even been able to muster much of a dead cat bounce. I'd avoid NTRI until some catalyst occurs that brings buyers into the stock. Right now, it looks like a crowded short ... and a really painful long.

Zoltek has been running back to test the August high. While Thursday's decline of less than 4% was actually better than many stocks fared, I'd stay away from ZOLT. There just isn't enough upside from this level.

Be careful out there.