Is today's market action a yellow flag? We had a high volume reversal in the major indices as well as in some leading stocks such as NFLX and FFIV. That said, a number of leading stocks had pullbacks which could be considered normal given the large gains they have made over the last few weeks. Further, a pullback of sorts is due for the general market which has gone straight up since the model's buy signal on September 1. And in the precious metals group, they fell then had a mid bar to strong finish, a sign of support.

Should we see deleterious action among a larger number of leading stocks, we will apprise members of any changes in signal given by the model.

 

Of course, always sell, no questions asked, if your stock hits your maximum loss % from your buy point which for most investors is 7-8%, and read this FAQ if you have not already:


How do you set your sell stops?
Our book discusses selling strategies in detail. That said, every investor must find their own risk tolerance levels. Some will have shorter hold times (swing traders, intermediate term traders) and others will prefer longer hold times. Some will pyramid just a few positions, so their stops for large positions will be different than, say, someone who holds several or more names. Some will prefer less volatility in their accounts so may wish to hold more names and have tighter stops.

In terms of how we set sell stops with pocket pivots, we use the 10dma and 50dma as our sell guides. That works for our trading personality. If the stock obeys the 10dma for at least 7 weeks, then we use the 10dma to sell the stock if it violates it. A violation occurs when the stock closes below the 10dma, then in subsequent days, trades below the low of that day. If the stock does not obey the 10dma for at least 7 weeks, we switch to using the 50dma as our sell guide to avoid getting whipped out of the position. Of course, if the general market turns sour, we are more than likely to sell the position even if it has not violated either the 10dma or 50dma. Gil is likely to sell his whole position knowing he can buy it back, while I may prefer to sell half, while trading around a core position. Sell stop placement is contextual with the strength or weakness of the general market. Also, if we have a stock that is lagging in a strong uptrending market, we will most likely cut the position in half or sell it entirely to make room for a stock showing greater upside potential.

In terms of how we set sell stops with gap ups which are an extreme form of pocket pivot, we have specific rules we discuss in our book. Generally, after buying the gap up, if the stock trades under the low of the gap up day over subsequent trading days, we will sell at least half the position. We find applying the sell rules we use with pocket pivots can work well with gap ups.

In terms of how we set sell stops with a stock that is breaking out of a base that may or may not coincide with a pocket pivot on that same day, we employ a similar sell rules used to sell pocket pivot stocks, knowing, however, that our loss may be greater because base breakouts are often bought further away from a major moving average such as the 10dma.