This is a FullyInformed members strategy article. Yesterday I picked up 1500 shares of UDOW ETF for $87.62. This morning the futures pointed to a much lower open due to IBM facing another quarter of declining revenue. This is getting to be a habit with IBM and shows the growing weakness within the PC and Enterprise markets as well. This may catch up with Microsoft and Intel next. Intel already reported their recent earnings which were decent but still reflected continued weakness within the overall PC and Smartphone markets. A recent email from an investor regarding the Market Direction Portfolio was filled with questions that needed answers. I felt her questions are probably being asked by other investors and completed this article for her. Here are her many questions
“I know you mentioned trying to avoid getting stopped out with an opening gap down in the morning if the market direction is still trending up. With a probable gap down tomorrow (Oct 17), based on current futures (of course that can change overnight) and IBM earnings causing them to trade down 5%+ after hours, would you expect to
- remove your stop for the open tomorrow and replace at the same or a lower level later in the day
- loosen (ie lower) it substantially right off the bat
- or just leave it and honor the current stop?
My difficulty with this strategy, (and one reason why I have tried and failed in the past) is not having a decent enough entry to quickly get a floor under my cost to put in a stop at, ie not having as favorable an entry as you did, due to factors you talked about in your article – lack of confidence in the early part of the trading session, forcing me to then wait for a pullback to get in later. I waited until a pullback today (Oct 16) (around 2:10 PM when DJIA pulled back from its 15374 high to around 15340, where I got a UDOW buy at $89.22, but unfortunately, had I waited another ½ hour I would have had a more advantageous entry point with UDOW around $0.50 lower.
End result – although I was not stopped out at my $88.50 stop and I ended the day up $0.42/share, I am concerned that with a gap down, or even a slow decline over the next day or two, could easily take me out at $88.50 even if the upward overall market trend stays intact. But I am hesitant to lower the stop too much lower, (in fact I originally was hoping to be able to raise it tomorrow) as I believe part of the success in this strategy seems to be strictly limiting the losses. (I had violated that rule in the past and as a result I am still holding a few hundred UDOW shares I bought in August at $93, which really should have been sold when the market trend changed to down!)
I am determined not to make that same mistake again, but hate to be shaken out of shares, only to have the trend continue up the same day. I have a hard time making the call, when stopped out, to get back in again. Would you always wait until the end of the day you get stopped out to look again at the indicators to see if the trend is still intact before re-buying in, even if you may lose some more upside that day?
Sorry for the long post, just wanted you to understand my difficulty and frustrations with trying to get this strategy right. I have read your current and Doug’s past member articles on this – they are very helpful – and am getting a better feel for it, but still could use a little guidance on the initial stages of building that floor underneath me. On that note, it would help me a lot if I understood your take on how you plan to handle any morning gap down and/or reflexive pullback in UDOW tomorrow (but not necessarily change in overall upward trend) after today’s big rally. I know we are in different circumstances, since your entry position leaves you with a small gain while mine would result in a loss, but any advice you have would be greatly appreciated. Thanks Betty”
My reply to her many questions is lengthy and detailed. It is 2900 words and FullyInformed members following the market direction portfolio will require 7 pages of paper to print this article. To read this strategy discussion FullyInformed Members can login directly through this link or Members can sign in here. For those investors who are not a member here are some of the benefits of becoming a member.
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