It’s time to take another look at the overall market now that we are clearly in the midst of a correction.
The good news is that we are still in an upward trending channel and we expect a lot of support from the bottom of the channel.
This is going to take some time to play out and with the market quite oversold on a short-term basis we expect there will be a rally next week.
It is very important technically for the SPY to remain in this channel.
However if the channel is broken to the downside we can see the market fill the gap from November and would expect even more support on the horizontal red line drawn on that gap.
 |
If the market is ready for a more substantial correction, we can look to the weekly chart for an indication of how far it could potentially fall.
Again, this is a longer-term analysis and does not mean we can not make good money trading short-term. We will just need to be more defensive as we proceed and not attempt to fight the tape.
 |
You can clearly see the channel on the chart above along with potential fibonacci retracements if the channel does indeed give way.
It is not a pretty picture as the first major support at the 38.2% retracement is a long way down at 96.80 on the SPY.
So the environment has turned somewhat negative in a short period of time as the market was literally hitting new 52-week highs just last week at roughly 115 on the SPY.
(By the way we use the SPY as the proxy for that we call “the market”. SPY is an ETF that trades just link a stock that represents the S&P 500 and trades at a price of 10% of the index. So if the SPY is at 109 the S&P 500 index will be right around 1090.)
With this in mind let there be no mistake, it is tough to trade stocks to the long side when the overall market is correcting.
Personally we lean more towards daytrading and are reluctant to have a lot of open positions at any one time. We tend to trade with smaller position sizes and always have stop-loss orders in place.
There will opportunities to swing-trade stocks however we suggest taking all profits at Target 1 on Trade Plans until the picture becomes clearer.
There are a lot of “busted charts” of individual stocks and the field of stocks with intact patterns is becoming a lot narrower.
The good news is that as long as we know to trade defensively we can still capture short-term gains, but this is no environment for buy and hold investing.
While it may seem quite contrary to conventional wisdom, we think that lower-priced stocks will offer some of the best opportunities to deliver quick in-an-out profits in the near-term. The reason is that the higher priced stocks can generally not deliver the 7% to 9% gains we look for quick enough to avoid holding into another potential leg down. Some of the lower-priced stocks also seem to have the most attractive patterns.
Regardless of what the overall market does, there will be plenty of opportunities to make money trading. The buy and hold investor, as we have mentioned many times, is in a really tough spot right now. We don’t think buy and hold investing is the way to go and we actually think it is much riskier than in-and-out trading.
Take a look at this chart of the market over the last 11 years.
 |
Anyone that bought “the market” in the red shaded area is underwater right now. As we see, the red shaded area encompasses much more time than the area below it, so the odds are that most buy and holders have lost money in this timeframe, hence the phrase “lost decade”.
Buying and holding individual stocks has fared much better in many cases, but then again it is all based on stock selection.
We are not against holding a stock for the long-term IF your cost basis has been lowered by trading the stock and selling a portion, so that you can have a stop in place to insure that you will never lose on the position.
We actually advocate a strategy of taking profits in shares rather than in dollars. This is the perfect way to build a portfolio of stocks with a very low cost basis and setting stops at that cost basis or even higher insures that you can never lose on the position.
Since we are not particularly constructive on the overall market or the idea of long-term buy and hold investing, we will focus on trading. Trading is where the money is made and the safest investment of all is when your trading account is all cash. Cash is king. Hit and run trading is our strategy because we don’t trust the market one bit over the long-haul.
Trading is a series of short-term bets. We always use stop-loss orders and know the risk ahead of time.
Looking at the chart above would you feel comfortable buying Monday as a lump-sum, long-term, buy-and-hold investor? I wouldn’t.
Next week we will focus on strategies we use for trading individual stocks.
 |
Research Lab Swing Trades Off To a Great Start With HEAT and MSPD
Filed Under Main Content | Leave a Comment
The year is off to a great start and we appreciate the feedback and support of all our members. We are glad to hear that you are already deep in the money following our Trade Plans.
 |
As you can see HEAT was the first trade of the year. It hit the Entry, Target 1 and Target 2 in the opening session. This morning it hit Target 3 and was moved to the Closed Trade Plans as the first big winner of the year.
MSPD was also on deck but just hit the Entry and filled today. It blasted right through all three Targets in today’s session and actually closed well over Target 3.
While the Trade Plans are designed to be Swing Trades, it’s nice to be able to lock in our target profits quickly.
We are thrilled to be off to such a great start and look forward to many more great trades like these.
We have done some behind-the-scenes work on our system and think it will pay off big going forward.
No matter what the market does, we can look forward to making money trading stocks.
There is currently one Trade Plan on deck that’s looking really good, so get your Entry in at your broker as it’s very likely to fill in the morning.
Until next time…best wishes and good trading!
Not a Member of the research Lab?
Click Here to See What It’s All About
 |
 |
Download The Market Toolbox
Desktop Financial Portal
The World’s Most Comprehensive Financial Software