Yesterday the major averages continued the slow rise and correction that has not produced much in terms of follow-through. The S&P 500 has left two sideways bars in the daily chart…both with narrow bodies. This is a testimonial to the a lack of commitment to the market. Perhaps this is not surprising considering we’re still in the Summer Doldrums. As we get closer to September and volume should pick up so should volatility. Our job now to then is to determine the best course of action when such a rise in volatility takes place.
Limited Brands (TLD), clobbered their earnings estimate at 54c vrs 23c. Taking out several one time non operating items they still made 36c. Intel (INTC) is buying McAfee (MFE) for $48 a share which is a 60% premium over closing yesterday for MFE. This is a second case this week that points out many companies still have deep balance sheets, and also the value of companies may be well above where they are selling in the markets now.
The futures were set to rise before the opening and then economic reports came out and squashed that chance. This has been a theme for the last several weeks. Despite good earnings companies future lower guidance and the economic reports clearly show we are slowing.
500K jobless claims were made and that is the highest since last November. The Philadelphia Fed Survey drove a stake in the futures heart by coming in a -7.7% from +5.5 in July. The Conference Boards leading economic Indicator also was out at .1%. Economists surveyed by Bloomberg had predicted the LEI would rise 0.1% in July and the Philadelphia Index would rise to 7 in August. Philadelphia Index readings above zero indicate an expansion; below zero, a contraction.
Ken Goldstein, economist for The Conference Board, said the good news in the LEI is that the latest numbers don’t indicate a double-dip recession is ahead. The bad news is, as inventory rebuilding has cooled, no other growth engine has emerged to increase U.S. GDP growth.
“The indicators point to a slow expansion through the end of the year,” Goldstein said in a statement. “With inventory rebuilding moderating, the industrial core of the economy has moved to a slower pace. There appears to be no change in the pace of the service sector. Combined, the result is a weak economy with little forward momentum. However, the good news is that the data do not point to a recession.”
Moving Stops Too Soon.
A reference to moving stops too soon was made in yesterdays article, and to elaborate for a reader more information is below.
Often a novice trade will enter a position and price proceeds to move in the direction of their trade. After a short profit appears they take some partial profit on the initial momentum and move their stop up. Often to break even or the original entry price. The remaining lot gets stopped out as price comes back to the entry area and later price goes on to the target.
First it is important that whatever strategy you have to move up stops (if you do) to protect “gains” should reflect your trading style and should be meticulously described in your trading plan. There are no one size fits all strategies, and what could be good for trader Joe might not be good at all for trader Jane.
Second, many traders simply do not move stops up at all. They le the trade play out on the relative merits of the stop and target(s) that got them into the trade. If you find you are not making money in your trading yet your trades eventually go on to target (without you having sold), you may consider an all or nothing management style.
To define moving stops in your trading plan:
– Define your trading style…are you a scalper, day trader or swing trader?
– What timeframe do you use for your entries and management?
– Are you looking only to capitalize on the momentum or are you willing to accept shallow pullbacks?
– How many lots do you use on your management (2, 3). What weight do these lots carry (overweight Lot 1, Lot 2)?
-Where do you usually place target 1 (Times 1 your Risk, Times 1.5, 2)? (Considering techical support/ resistance)
Based on the answers to these questions you can establish rules for your trade management. Also answer the following questions:
– How will you exit Lot 1 (Trailing stop, selling into strength at Target 1)?
– When will you move your stop for Lot 2?
The problem then is to determine when and under what circumstances should you move your stop. Novice traders fearful of losses tend to move stops to breakeven too soon. But still want to protect a winning trade and avoid watching it turn into a losing one.
The dilemma is: When you move your stop to breakeven just for the sake of protecting money, that level may not have a technical reason. Breakeven is just a level unless it has a technical area of support / resistance that is relevant to the trade. Sometimes this means you’ll have to avoid moving your stop until there’s one of these areas forming in a chart. This requires allowing that support/resistance to be created through a pullback or consolidation action.
Is it inherently a mistake to move a stop quickly to breakeven? Not necessarily, but you’ll need to understand that in doing so you’ll be stopping out more often of a perfectly viable position on a minor pullback due to excessive micro management.
If you believe in your trading plan a better approach to this problem might be to have a quantifiable move that will need to occur before the stop is moved to a trailing stop. This could be a minor pull back on a lower time frame, a short base or ledge that forms, or a money management rule that says you will do this after 1R or 2R is reached. (‘R’ is a risk unit or the amount you risk as a maximum loss on any trade. See the share sizing article in the recommended section for more information.)
Money management rules are the basis of a viable trading plan. Think them through when building yours.
Trade with a plan.