Should You Use A Time Stop?
Time Stops—Two Schools Of Thought
Zimmer Holdings
(
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PowerRating), mentioned recently, triggered
(a) but then proceeded to trade sideways (b). However, other than trading
sideways, the stock did nothing “wrong” during this period. Finally,
the stock begins to move on Monday(c). There are two schools of thought when
it comes to using time stops when momentum swing trading: 1) Get out after 1 or 2 days of no action
(i.e. use a time stop) or 2) Set your stops and let the chips fall where
they may–good, bad or indifferent. I prefer the latter since psychologically, I
hate missing a move. Keep in mind that in trading, there IS no right way
(provided of course, you have a risk control plan in place). By
staying with a position that is not performing you have the potential for an
eventual winner but you tie up capital and have open
market exposure. Conversely, by exiting early, you avoid this exposure (and can
look for other opportunities to replace it) but will miss out should a move finally
ensue.
Looking to the indices, on Monday, the Nasdaq opened firmer
and continued nicely higher in early trading. Then, after trading sideways
throughout mid-day, it resumed its rally going into the close. This action has
it closing well and yet again, rallying nicely after testing its 50-day moving
average.
The S&P put in a similar performance.
So what do we do? The fact that the indices
are pushing yearly highs after successfully testing their 50-day moving averages
suggests that the uptrend remains intact. Further, Monday’s action improves many
sectors that were beginning to look questionable such as retail. On the long
side, (other than in gold) I’m not seeing many setups (yet). Therefore, if you
took recent index trades, you might look to trail a stop higher and scale out
(i.e. take partial profits) on any additional upside. On the short side,
continue watching of opportunities in areas that still look vulnerable such as
broker/dealer and to a lesser extent, Internet. However, in light of Monday’s
action, you might want to wait for entries.
Looking to potential setups, Goldcorp
(
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PowerRating), looks like
it has the potential to resume its uptrend out of a Trend Knockout (TKO).
Sina
(
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News |
PowerRating), mentioned recently and in the weak
Internet-software & services sub-sector, still looks poised to continue its
downtrend out of a pullback/inverted cup and handle-like pattern. However, you
probably want to wait for an entry here since it was up sharply on Monday.
Best of luck with your trading on Tuesday!
Dave Landry
P.S. Reminder: Protective stops on
every trade!
P.P.S. Learn my best swing
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