What’s Your Strategy For Protecting Gains?
What Monday’s Action Tells You
The
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PowerRating) closed at 102.84 on Friday, then
opened at 103.04 yesterday and traded up on an expansion of range with a volume
increase, and there was nothing resembling a Trap Door until the SPY hit 103.77
on the 10:20 a.m. ET bar. There was a flurry of early news, like the
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IBM |
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upgrade, Barron’s article on the drugs as value, etc., in addition to my
favorite: the upgrade of the semiconductor equipment stocks by Smith Barney to
“overweight” from “market weight.” Hello. For the last six months as the SPX
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$SPX.X |
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PowerRating) made its retracement bottom in March, this sector was number 2
out of 214 sectors and up over 130% for the past six months going into
yesterday’s trading. It’s the “sell
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INTC |
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PowerRating) at 15 and buy it at 30 syndrome”
to cover your — and chase price. After 10:30 a.m., all of the major indices
trade sideways for the remainder of the session, and the SPY closed at 103.68.
Throughout the early up move, all of the major
sectors were green, except for the RTH, which was red from wire to wire. NYSE
volume was 1.3 billion, the volume ratio 78, breadth +1235 and was better than
+1000 all day, so that’s very positive. The SPX closed at 1031.64, +1.0%, while
the Dow
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PowerRating) was +0.9% at 9586. Also, helped by the hyped up commentary
on the tech sector in general, the Nasdaq
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QQQ |
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PowerRating)s at 34.46 were +1.6% and +1.5%, respectively. In the major sectors,
the
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PPH |
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BBH |
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+2.6% and the
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Friday, the upbeat semiconductor news must have had a sneak preview for some of
the Generals last week.
For Active Traders
From a daytrading standpoint, early up and then
sideways for the rest of the day, or vice-versa, is not what you need because of
the chop. The initial two short trades in the SPX you might have taken each
declined just a little over 20 cents on the SPY before reversing up, so you were
forced to scratch the trades. There weren’t any significant retracements to get
you involved on the long side, so unless you caught some individual stock setups
by scrolling your intraday charts, or a scalp, it was lean pickings yesterday.
I have included a weekly SPX chart since the 1553
high through the current bear market lows of 776, 769 and 789, which highlights
some key upside awareness levels which include:
- The .382 retracement to 1553 from 769 at 1068.
- 1070, which is the price objective from the
three-month 1015 to 960 box breakout. - Above that is the approximate 1110 – 1125
head-and-shoulder price objective measured from 930. - The 1160 level, which is the .50 retracement
to 1553.
From a longer-term index proxy position
perspective, which most of you have in your IRAs, you have nothing to do except
watch with the SPX trading above all of its rising 10-, 30- and 40-week EMAs,
along with, of course, the 12-month EMA. In addition, price is now trading above
the recent three-month trading range box, so until something alters the
situation, you’re looking really good on a mark-to-the-market basis.
However, that is not my thought process for
aggressive position traders who bought this market on the 789 retracement to
769, which is a 1,2,3 higher bottom and also an RST. The biggest risk is losing
what you have made to date, especially since the last positive year was 1999.
So, this corner will take steps to do just that if the SPX continues to trade
higher above 1050 on the SPX. SPX gains at that point at 1050 would run from 35%
at the lows to 31% based on the SPX at 800. It would be about +25% for those
that got in around 840.
One way to accomplish this is to utilize index
put protection, as implied volatility is now at the low end of the range. Simply
put, my experience and how I define risk tells me I would rather pay for some
insurance where if the SPX goes up, for example, another 30%, you could only
participate in 23% of that move. Would you really care? But if it goes down 30%,
you only lose, for example, 7.0% of the substantial gains already made since
entry at substantially lower levels, especially if you are in the QQQs.
There are several ways to reduce the cost of
insurance, but are only for those with a substantial option education and
experience, so don’t get involved unless you are one. Some hedge funds trying to
lock in a good year should be doing this, since it’s been a while since they’ve
had happy investors. Most people freeze in the headlights trying to market time
a decision like this if the market heads south, so this is one way to take the
emotion out of the decision. If you are not qualified to utilize option
strategies, then don’t, says “Yogi Berra.”
Have a good trading day,
Kevin Haggerty
