How To Protect Yourself When Playing Pullbacks
How Do You Know?
One of the most common questions I’m asked as a momentum
based swing trader is “How do you know that this pullback won’t be
the last?” My answer: you don’t. In fact, you have to expect that it
could be the last and protect yourself accordingly. This can be accomplished by waiting for entries, using
protective stops and practicing proper money management. Let’s look an example of each.
Waiting for entries: Centex Corp.
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PowerRating), mentioned on
06/18/2003 (a), sold off hard with the rest of the group on the following days.
Fortunately, it did not trigger an entry (b).
Using protective stops: Icos
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PowerRating), mentioned on
6/16/2003, triggers on the following day (a). The stock then reverses and begins
to sell off. In this situation, you should be stopped out at a loss (b). It
happens. Some would add a “Sh” to the beginning of that last sentence.
Practicing proper money management: Tol Brothers
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PowerRating)
was mentioned on 06/09/2003. Notice the stock triggers and entry (a) and rises more
than 2-points above that entry (b). At this point, profits could be taken on
half of the shares and the stop could have been moved to breakeven (c)–the same
as the entry. The stock slides to hit the stop for essentially a scratch
on the remaining shares. As you can see, without proper money management, this slightly
profitable (overall) trade would have resulted in a loss.
Looking to the indices, on Monday, the Nasdaq opened weaker
and sold off hard throughout the morning. It then traded mostly sideways before
resuming its sell off in late afternoon trading. It did manage to bounce going
into the close but this wasn’t enough to keep it from closing poorly.Â
The minor double top remains intact. On the bright side, minor
support, circa 1600, held.
The S&P put in a similar performance. It too held minor
support.
Looking to the sectors, on the downside, biotech continues
to slide. This action suggests that they could be in the early phase of rolling
over. We could see transitional shorts (e.g. First Thrusts, Bowties, Inverted
Cup and Handles) here soon. The semis also continue to lose steam and could also
be rolling over. On the upside, the homebuilders appear to have stabilized (for now)
and healthcare plans (basis the Media General sub-sector) bounced off their worst
levels. This action suggests that their uptrends may remain intact.
 So what do we do? So far, the indices
remain in a longer-term uptrend. And, so far, they appear to be finding minor
support. In the sectors, poor sector action in areas such as biotech and to
a lesser extent the semis is cause for some concern. Therefore, you probably
want to stick with those sectors that are stabilizing in their pullbacks of
longer-term trends (e.g. HMOs). However, wait for entries and honor your
protective stops just in case the correction continues. Â
Looking to potential setups, Healthnet
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PowerRating), mentioned
recently and in the
aforementioned HMOs, still looks like it has the potential to resume its strong uptrend out of a pullback.
Best of luck with your trading on Tuesday!
Dave Landry
P.S. Reminder: Protective stops on
every trade!
“….. I have learned more from you than any other traders I have studied thru the years. Your writing is so easy to understand. And your setups actually make money!! I use your trend qualifiers, simple pullbacks, TKOs, trend pivot
pullbacks, and bow ties to trade the futures markets……. I’ve had your book for almost a year, and I still read it often.
THANKS for such a great book and articles on TM.com…………..”
Lin S.
