If You’re Afraid Of Being Whipsawed In A Trade, Try This
Did
you miss the pullback? It was yesterday. For those hoping for an
orderly pullback in which to enter this market, you’re still waiting. On Monday
I wrote the following:
In strongly trending
markets, pullbacks can sometimes be very brief. It is not usual that you will
see a nice looking 4-day pullback on declining volume that is halted right at an
obvious support level. Very strong markets (both up and down) many times will
offer little opportunity for entry.
It may seem to those who are
sitting on cash waiting for the perfect opportunity to enter this market that
this recent leg up is unprecedented for its persistency (Dave Landry word). On
the contrary, this is what strong trends look like. The move the S&P has made
the last few weeks is comparable to what it did from December ’03 to through
late January ’04, or from mid-April ’03 though mid-June ’03. (And in case you
think this is only an uptrend phenomenon, check out May-July of ’02.)Â
Strong trends can go quite
far before offering nice-looking pullback opportunities. Don’t chase, but don’t
just sit there either. Let’s talk about how breakouts may be handled at this
point in time as an example.
When the market is overbought
and due for a pullback, buying breakouts can be tricky. You don’t want to pass
up an opportunity to go long in a strongly trending market, but you know the
fact that it is extended increases your risk, and means your new purchase could
suffer a shakeout once the inevitable pullback occurs. So what should you do?
As I’ve said in the past, I
don’t believe one’s opinion of the market is a good reason to pass on a trade.Â
If the stock meets your criteria from a fundamental and technical standpoint,
and a setup triggers, then you should take the trade. Assuming your setups and
trading criteria provide you with a favorable risk/reward, this is the correct
move.
If your market opinion is
negative, then you may look for ways to reduce the risk in your trade. Reduced
position size, quick partial profit-taking and tight stops are a few of my
favorite ways to do this. Most traders look to take these kinds of defensive
measures when the overall market outlook is poor. It may also be appropriate to
apply them when the overall market outlook is positive, but the short-term
outlook is negative. A short-term overbought condition is one situation where
this could be applicable.
Rather than passing on a trade
because your afraid of being whipsawed in an overbought environment, take the
trade, but utilize your bear-market defensive strategies. After the pullback
you’re anticipating occurs and it looks like the trend is ready to re-assert
itself, then you can get more aggressive playing your breakouts again.
Best of luck with your trading,
Rob
Â