*** Meet David in London this Saturday*** David’s seminar at Round-the-Clock-Trader LIVE! starts at 3pm in the DAX Theatre. Use code RTC001 for your free ticket to the show – http://www.roundtheclocktrader.live
Over the past week the forecast sell off in the UK market that I have been writing about in this column got underway. The VectorVest UK Composite which is an equally weighted index of all the shares that we follow on the LSE and AIM fell marginally. The lows of the past three days were made by the order flow at two previous highs made on the 15th of August and 23rd September 2016. This concept of where former resistance becomes support is a fundamental law of chart analysis. This is a vitally important level.
On the VectorVest composite the level is 370p and on the FT100 the level is 6925. Watch these levels closely.
On my chart the Composite has closed below the trendline defining the upmove from the Brexit low and is sandwiched between this trendline and the horizontal support line mentioned in the last paragraph. The long and very marked bearish divergence between the MTI and the Composite makes me feel that more downside is highly possible. I note that on Friday the composite ticked up and it was a positive day. Even under the most bearish situation this is normal. Invariably when an important trendline is broken the market will go back and “kiss” the former support. It’s an excellent entry tool that I have been using in short term trading for many years. Please do not allow a single positive day to take your focus from managing the positions that you have.
The short term daily chart of the UK Composite is shown below with the important support lines easily seen.
On VectorVest the Primary Wave is down while all other more conservative measures of the trend are still positive for the stock bulls. The advice on the front page says all there needs to be said. VectorVest does not advocate buying stocks at this time. In VectorVest speak the trend situation is Down/Up. This means the short term trend is down while the underlying trend is still positive for the bulls.
Last week I mentioned a bullish flag on Hill and Smith. Unfortunately the support from the trendline defining the lower boundary of the flag failed and the share hit its stop. I would suspect that the professionals will have their next batch of orders at the last old high which occurred in the first week of May 2016. This level is 1000p. The level is also a 50% retracement of the last range.
I would now like to discuss exits and will use Hill and Smith as an example. Exits are the most difficult aspect of trading at least for me. There is NO hard and fast and rule here but rather the exit process is a philosophy that has been thought through and committed to paper within a trading plan. There are dozens of ways of exiting a position and here I will review a few that have worked for me over the years and that I currently use.
The simplest is just use the automatically calculated stop loss on VectorVest. Once you see red beside the share just get out. If this is the exit you have chosen in your trading plan then Hill and Smith would have been sold a few days ago.
My first and still favorite exit strategy was taught by my first mentor in the early 1980ies. It is simply a 25% trailing stop loss. The old man reckoned that anything less would not hold the position through the normal ebb and flow of the market. Every weekend I would look at the highest tick made by the share and calculate this level. For example in Hill and Smith the highest tick was 1245, reached on the 12th September. The trailing stop on the share at 934 hasn’t changed since this date. The tool is simple and takes little maintenance and in this day and age with ft350 stocks can be placed on a trading platform and executed automatically. The tool also rides high momentum moves in undervalued stocks that are growing earnings aggressively and safely. The advantage is staying within a big move and ignoring the noise. The disadvantage is giving back a lot if the market fails to hold the 25% pullback. The latter, in my view, rules out this method of exit in leveraged positions.
If I trade with a leveraged position using a spread bet or a CFD then it’s important (again in my view) to be only in the market in the high upward momentum move. This means selling into strength prior to the end of this move. To accomplish this a knowledge of FIB is required. It’s quite simple to calculate and VectorVest does the sums for you. The technique will also be useful for those who just cannot handle the pullback even with an unleveraged position. FIB analysis is used to calculate retracements and extensions of a trading range. To calculate a target we extend the last pullback by the Golden Section 1.618. Fundamental analysts normally shake their head at me when I speak about this at seminars but it invariably stops the market in its tracks. On Hill and Smith observe the Brexit pullback which took place between the 19th May and the 27th June 2016. The range is calculated by subtracting the highest tick on the 19th May from the lowest tick on the 27th June. Take that number and multiply it by 1.618 and add the resultant figure to the low of the 27th June. You have just calculated a 1.618 extension of the last range. In the case of Hill and Smith that level was 1163. That was the level that swing traders and leveraged traders should have been selling into. On VectorVest the calculation is done automatically within the “drawing tools” drop down. If you struggle then please call support at 0800 014 8974 in the UK and 0800 981 891 in SA. I have been advising swing traders to exit Hill and Smith at the 1.618 extension for many weeks in the bi weekly webcasts that I do.
In a very strong market the move can easily continue to a 2.618 extension of the last pullback and even in extreme cases to a 4.23 extension. If missing this potential upsets, then with a little creativity you should be able to invent a rule to take partial profits at the 1.618 extension and let some of the position run. These are your rules, in your plan. They need to make intuitive sense to you.
At our Oxford User Group we have a very experienced trader who uses a weekly chart for both entries and exits. As you know the weekly chart is the basis of the Weekly Zone Trade that I have detailed in this column at length. The trader uses a 3 and 8 week exponential moving average cross to confirm both entry and exit. This method is robust and would have got us out of Hill and Smith a few weeks ago. It is an excellent and mechanical process that just needs to be monitored once a week. Again if you struggle to apply the averages to the weekly chart and even find the weekly chart then please call support.
Finally in lesson 2 of the “Successful Investing Quick Start Course” there are a variety of exit rules discussed. The lesson is a must and should be retaken once a month until deep within the subconscious. The course is situated within the training tab on the VectorVest program.
Please don’t be upset if I haven’t discussed your favorite exit criteria. My objective here is to stimulate thought and to get everyone on the path to a technique that’s correct and intuitive for themselves. I have three exits plans. The first is for unleveraged positions and here use the 25% trailing stop. For leveraged positions and intraday /2 day trades I use FIB to predict exit levels as above. The third is the standard VectorVest stop which is part and parcel of the Worry Free Investment technique (WFI).
Over the past 15 years most of my trading has been relatively short term, holding positions for a few days to 5 weeks at most. In this time it was the FIB exits that were used exclusively. I am now trying to become more long term in my outlook with a portion of my capital and find the pullbacks difficult. I would find it impossible with leverage.
We don’t know with any certainty what the market is going to do next but we can pre plan what we will do in any potential market move up, down or nowhere.
Please commit your exit technique to paper.
On a tangent the Worry Free Investment portfolios that I started on my birthday (three months ago) are both doing well in the UK and SA. They are both well ahead of their respective market as measured by the VectorVest Composite. In these as per the WFI rules the stop loss used is the standard VectorVest stop. So far in both countries there has been no activity since the entries on the 19th July.
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David Paul
October 28th 2016
*** Meet David in London this Saturday*** David’s seminar at Round-the-Clock-Trader LIVE! starts at 3pm in the DAX Theatre. Use code RTC001 for your free ticket to the show – http://www.roundtheclocktrader.live
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