{"id":3664,"date":"2014-01-27T11:32:05","date_gmt":"2014-01-27T16:32:05","guid":{"rendered":"http:\/\/www.morpheustrading.com\/blog\/?p=3664"},"modified":"2022-04-06T15:05:48","modified_gmt":"2022-04-06T19:05:48","slug":"not-time-sell-stocks","status":"publish","type":"post","link":"https:\/\/morpheustrading.com\/blog\/not-time-sell-stocks\/","title":{"rendered":"Why It’s Not Time To Sell Your Stocks (But Keep Finger On Trigger)"},"content":{"rendered":"

\"Exit-button-stock-market\"All the main stock market indexes plunged at least 2% on heavy volume on January 24, but how much did that really affect the “big picture” of the overall market trend?<\/span><\/span><\/p>\n

Trend and momentum swing traders (like me) surely gave back a chunk of unrealized gains on their winning positions (and stopped out of a few stagnant trades).<\/p>\n

But astute traders knows that one day of price action does not change the direction of a dominant market trend.<\/strong><\/em><\/p>\n

So, what would? Let’s take an objective look at key support levels on a few charts that may help to answer that question.<\/p>\n

NASDAQ Intact<\/h1>\n

The most negative technical aspect of the NASDAQ Composite is the back to back days of higher volume selling (“distribution days”) that formed on January 23 and 24.<\/p>\n

While a healthy bull market can easily absorb the occasional bout of institutional selling, it’s never a good sign when distribution days begin to cluster within a brief period of time.<\/p>\n

The heavy volume selling recently hitting the NASDAQ is shown on the daily chart below:<\/p>\n

\"$qqq<\/p>\n

Despite the break of the 20-day exponential moving average (beige line) on higher turnover, the NASDAQ remains above key, intermediate-term support of its 50-day moving average (teal line).<\/p>\n

Since pullbacks to the 50-day moving average frequently trigger computerized buying amongst institutions, it is safe to say the dominant uptrend of the NASDAQ remains intact.<\/p>\n

Furthermore, the 50-day moving average is converging with the highs of the prior base (4,050 to 4,100 area). Convergence of support areas makes those technical support levels stronger.<\/strong><\/p>\n

In the coming week, the price of the NASDAQ could easily “undercut” the 4,050 to 4,100 area of support and bounce higher from near-term “oversold” conditions (though I think “overbought” and “oversold” are largely useless words).<\/p>\n

S&P 500 through the 50<\/h1>\n

Although the NASDAQ uptrend may still be in effect, the chart pattern of the S&P 500 shows the benchmark US index is in much worse shape.<\/p>\n

The ugly selloff of January 24 caused the S&P 500 SPDR ($SPY), a mainstay ETF proxy of the S&P 500 Index, to breakdown below its 50-day moving average (around $181).<\/p>\n

The next support for $SPY is in the $176-$177 area, and is formed by the prior highs of October\/November 2013, as well as the “swing low” of the December 2013 low.<\/p>\n

If $SPY falls to that level in the coming days, you might again expect \u00a0relief bounce from near-term “oversold” conditions: There is a cluster of support around $176, which is where we could expect some sort of relief bounce from short-term “oversold” conditions:<\/p>\n

\"$SPY<\/p>\n

Sour, But Not Rotten<\/h1>\n

There’s no doubt that overall broad market conditions have quickly turned sour, but before turning bearish, I need to see how well the S&P and NASDAQ hold up as they test the next support levels discussed above.<\/p>\n

I also would need to further bearish confirmation before closing all existing long positions and focusing on short selling.<\/p>\n

If, for example, the NASDAQ Composite and Russell 2000 followed the S&P 500 below by slicing below their respective 50-day moving averages, our rule-based market timing model (learn more\u00a0here<\/a>) would be forced into “sell” mode.<\/p>\n

Additionally, if most of my existing stock and ETF positions began to melt through obvious support levels, it would provide further confirmation that stocks are headed for a substantial correction (which is\u00a0not<\/em>\u00a0to be confused with the end of a long-term uptrend).<\/p>\n

But for now, I will definitely be avoiding new trade entries on the short side of the market (remember I am a trend trader<\/strong>). There will be plenty of time for low-risk short selling if\/when the market eventually breaks down.<\/p>\n

Calm, Logical Plan Of Attack<\/h1>\n

Over the next few days, I plan to hold off on establishing new positions, and simply seeing how stocks react to last week’s distribution.<\/p>\n

Nevertheless, in the current mode of my timing model (details restricted to current newsletter<\/a> subscribers), there is no concrete rule stating I can not buy an “A rated” stock on a pullback (if a low-risk entry point presents itself).<\/p>\n

When my stock market timing system was developed, the idea was not to prevent me from being flexible. Rather, it was designed to prevent me from making costly mistakes.<\/p>\n

For example, entering 4 to 5 new long positions while the major averages are still below their 20-period exponential moving averages on the hourly chart is dangerous.<\/p>\n

But “dipping a toe in the water” with 1 or 2 positions (and\u00a0<\/em>with reduced shares) when the market begins to settle down is fine.<\/p>\n

Overall, you need to follow a rule-based trading system, but with logical allowances for flexibility.<\/p>\n

Not surprisingly, I surrendered some gains on my winning stock trades last Friday, but nearly all of these positions are still much higher than if I would have\u00a0blindly called a top<\/strong> and sold my stocks for no valid reason several weeks ago.<\/p>\n

To ensure consistent, long-term profitability as a swing and\/or position trader, it’s imperative to ride the profits on your winning trades until negative price action gives you a valid reason to sell. Only now are we\u00a0possibly<\/em> seeing valid reason.<\/p>\n

If you don’t want to miss our next potential “sell” signal, start your subscription<\/strong><\/a> to The Wagner Daily report (which includes full access to our market timing system for intermediate-term trading).<\/em><\/p>\n