Stop Losses During the Uptrend

Stop Losses During the Uptrend

The previous examples were illustrating stop loss reasoning in the initiation of a trade. The next strategy to consider is, “what should be done when the uptrend has started.” This again incorporates commonsense planning. Back to the ba­sics, what does the candlestick buy signal represent? It is the change of investor sentiment, the “trend” should be up. Does a trend go straight up? As much as we would like it to, there will be zigs and zags in tire price movement. The only reason for putting a stop loss on, during a good trending situation, is to protect yourself from that rare catastrophic announcement. Otherwise a stop loss, too close to the price oscillations, could stop you out at a low point of an up- trending trade.

Once the trend starts, candlestick analysis can be applied. The same think­ing process can be used for evaluating whether a trade is still working or not. A price level can be predetermined as to where it would be indicating that the sellers have taken control. During an uptrend, more latitude can be given. The longer the uptrend continues, the more definite a ‘sell’ signal needs to be to reveal that the trend has terminated.

Note in Fig. 10-9, the NASDAQ chart the trend was apparent until the gap down in price broke the trend lines.

Since March 10, 2003, the NASDAQ chart has shown a steady uptrend. These trends would continue for a month and a half at a time. Upon closer observa­tion, it will be seen that there were definite sell signals in those periods. Does that diminish the validity of the signals? No, the signals need to be heeded. However, they need to be evaluated based upon the environment that they are being viewed.

As seen in Fig. 10-10, the DOW chart, the signals divulge selling at the top of the trend channel. That provides valuable information. For the short-term trader, it becomes evident that the upside channel is not going to be breached. Indi­vidual stock charts may have already produced a strong run up. The charts showing toppy signals can be liquidated. Why own a stock that appears to have great probabilities of going back down? Take profits! Positions can always be bought back when sell signals are negated.

Will the stocks with toppy chart patterns be finished as far as further upside? That can be determined by seeing what the next down move will do. Observa­tion reveals that for the past few weeks, the pullbacks have been supported by the bottom channel trendline.

If not as aggressive a trade, the longer-term position holder can sit through a pullback, using the bottom of the trend channel as a guide, alleviating the need for bopping in and out of a trade.

Note the third week in May; the bottom of the trend channel is breached, occurring about three months after the start of the uptrend. Not a bullish sign. Take some profits. But keep in the back of your mind that a strong reversal signal is required to change the trend. The longer the trend, the more powerful the reversal has to be demonstrated. That is a function of the investment psy­chology in the markets. The longer a trend continues the more compelling a sell signal needs to be to show investors that the trend is finally over. The optimistic (or pessimistic) attitudes that are being ingrained during the trend are hard to dispel as the direction of the trend changes.

Further analysis of the NASDAQ chart shows that the selling that broke through the bottom of the trend immediately stopped with the appearance of a couple small hammers, and then continued buying. Other technical analysis would have evaluated this as consolidation in the beginning of a downtrend. The Candlestick analyst has the benefit of visually seeing that buying is occur­ring, stochastics at the bottom, curling up. Instead of a full fledged selling program, the candlestick investor would be watching to see if continued strength was coming back into the market.

Would a sell stop have been prudent when the trading breached the lower trend channel? The “probabilities” indicated that the sellers were taking con­trol. However, the individual stock positions should have been evaluated as to what their chart signals indicated. This would have eliminated a mass selling spree. Seeing the hammers, after the bottom of the trend channel was breached, gave a forbodence of the downtrend not being a powerful move. If stopped out, it was probably done in positions that had good profits from the preceding uptrend. That does not preclude an investor from getting right back in to the same positions after they have consolidated and started moving back up. Bet­ter yet, those funds could be moved to new sectors/positions that were coming out of oversold conditions, with much greater upside potential and lower down­side risk.