When the volatility is down, traders often find themselves chasing when they see strength.  By the time their indicators line up, it’s too late.   On the other hand, one of the lessons traders learn early on is, “never try to catch a falling knife.”  The Feeling that you are either chasing a stock or trying to pick a bottomless bottom, can be a hopeless feeling for any trader.

The good news is that traders can profit by finding relative strength and they can also profit by finding stocks with oversold conditions!  The key to finding successful trades, is that you must have a point of reference(price point) to attach to that particular trade idea.

Without that “line in the sand,” traders are lost and find themselves battling their own trading demons.

In the examples below, Joy Global(Ticker JOYG, NASDAQ) in oversold conditions last week, we took advantage of this trade once we determined an area that we could “lean on.”  We found previous support back on 10/02/09 at $43.80.  The 200 day moving average was lining up with that area near $44.00.  Now that this area gathered our attention, we needed a confirmed point of reference.  On 2/5/2010 a new low was put in at $42.45 leaving a reversal candlestick and closing over the $44.00 area of interest.

We established a calculated trade to enter for the follow day.

 The second example, Research In Motion(Ticker RIMM, NASDAQ) has displayed relative strength in the current market conditions.  The stock has been on our radar for the past couple of weeks.  We found an area at $72.00, that if broken, the stock has room to “run.”  At the same time we need to be careful that we aren’t chasing a stock that has just gone from $66.00 to $71.00 in the previous five trading sessions.  We are looking for RIMM to rest in this area for a few more days.  With rest, paying $72.00 for RIMM would no longer be a chase.  If RIMM goes too soon, it’s a “chase,” and we have to leave that trade alone.