The Stop Loss Plan
Stockscores.com Perspectives for the week ending September 21, 2008
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In this week's issue:
This was one of the most abnormal weeks in the market that I have ever witnessed in my nearly 20 years of trading. The price volatility was extreme, but what stood out more were the steps taken to calm and fix markets that were firmly in the clutches of the bears. I received a lot more email than normal from investors asking me about their stocks but I also received a lot of email from traders telling me how well they were doing in this environment. Volatility is the trader's friend, even if it is to the downside.
This week, the media has presented many stories and articles about the need to ride out these hard times and take a long term view of the market. So many investment advisors excuse their ineptitude with this often preached doctrine as a way to quell the complaints of investors who own stocks at a dramatic discount to what they paid. There is a better way, and it is remarkably simple.
I am not an advocate of selling in times of panic, so I do agree that investors should not rush to appease their emotions and exit stocks in conditions so firmly in the sellers' control.
But, it should not come to that.
Investors should be exiting stocks long before situations like this week arise. In doing so, they save themselves financial and emotional capital and prepare for the opportunities that come with panic based selling.
For every trade you make, no matter how strong the company's fundamentals appear to be, you MUST plan to lose. Stop thinking about the money you could make and instead think only about what you could lose if you are wrong.
In the course of trading the market will establish floor prices that represent the lowest price sellers were willing to accept for the fundamentals of the company. Whether you look on an intraday two minute chart, a daily chart or a weekly chart, you will see these price floors where the buyers took control of the stock and it stopped going down and started to go up.
These points, which I call inflection points, are critical because they are where you should plan to lose. Consider what an inflection point represents; it is where the sellers said lower prices are not worth it and buyers jumped in and started to drive prices higher. If the stock falls below the inflection point then there must be some new and negative perceptions about what the company's stock is worth.
I always establish this price floor for every trade that I make and, if the stock closes below that price floor, I exit. Simple.
Yes, simple, but potentially painful. We as humans hate to feel pain, we run from it and do things to convince ourselves that we do not need to lock in that feeling of pain. If we are to have any chance of being market beating investors, we must learn to embrace the small pain that comes when we take losses on stocks that we are wrong on. If the stock closes below support, sell it.
AIG (AIG), the company that had to be bailed out by the US Government last week, broke through support in July of 2007 at about $65. The decline has been swift and constant since then, its Friday close was $3.85.
Nortel (NT, T.NT) also broke support around that time, taking it from $25 to $3.25.
Uranium One (T.UUU), one of the big winners of one of the recent commodity stock bubbles, broke down in June of 2007 taking it from $13 to $3.50.
A stock that puts its investors through the suffering of long term downward trends must always start with a break of support. By establishing support when you enter the trade, you know where the exit door is in case the market yells fire.
Planning to lose is the most important thing that I can teach investors. So simple yet so often overlooked by those who fall in to love with the stocks that they own. Never get emotional about stocks, cut the losers loose when they move through these important price floors.
Over the next 6 weeks I will be traveling to major Canadian cities doing presentations to investors on how to make better decisions in the market. Better decisions on what to buy, what to sell, how to manage risk and manage emotions. These four pillars of investing are things that every investor should learn and apply before making another trade.
The good people at the brokerage DisnatDirect are sponsoring these events so there is no cost to attend. We are not asking anyone to buy anything, in fact, attendees of these presentations who decide to move their brokerage business to DisnatDirect will receive my StockSchool Pro educational package for free once they have completed the transfer of their accounts. That's worth $3k.
I hope to see many of you at these presentations and I am certain that what you learn will help you improve your performance in the stock market. If you wish to attend, please register by Clicking Here so that we can be sure to have enough space.
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The market has made its bounce off of support as I thought it would, albeit a few days later than I expected. This likely brings a shift in investor psychology as panic is replaced by a sense of opportunity that there are bargains to be had. It also allows stocks that have showed stability through the past few months of selling pressure to attract some buyers. I don't think we are at the cusp of a major and long term upward trend, but we should be able to see some optimistic charts evolve in to trends as pessimism subsides.
With that in mind, I ran the Stockscores Simple Market Scan this week, seeking out stocks that were breaking through resistance from optimistic chart patterns. As always, I like to see volume supporting the breakout and upside potential to resistance that is at least twice the risk potential down to support.
Here are some charts that stand out and are worth considering:
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1. FIZZ
The one year chart of FIZZ shows a cup and handle pattern with resistance at $9.50. The stock broke through that ceiling on Friday with strong volume and looks to be ready to turn around after its heavy sell off one year ago. Support at $8.25.
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2. OMPI
OMPI has been building an ascending triangle pattern, a sign that investors are growing optimistic about the company. A move from here to $17.50 is reasonable so long as support at $8.90 is not broken.
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References
Get the Stockscore on any of over 20,000 North American stocks.
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See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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