OK I give!

After being in South Florida and watching helplessly as the market continued it sell off, I realized there was a serious flaw in my blog, and my ability to offer timely info in a quickly changing trading environment.  Early Friday morning, and the overnight futures were down hard and it looked like a gap open, I realized I had no way to communicate concern about existing sell stop pricing.  It was clear that the market was going to open below a level that would trigger my suggested sell stops.  I of course can pull my own orders, but there is no way to communicate that suggestion prior the open.

So I want to offer a suggestion that any trader should be aware that a gap open can create a very painful experience.  A GTC Sell Stop order , placed at 50 when the stock is at , lets say 52, becomes a market order to sell when the price falls below GTC Sell Stop price.  For instance, if a stock were to open at 48, the Sell Stop would be executed at 48, 2 points lower than the stop price.  In situations like we saw Friday, when nervous sellers overwhelm the orderly opening process, it often occurs that the opening price for that day will turn out to the the low of the day.  It is often the case that after an hour or so of trading, the market will sort its self out, the emotion of the early morning is tempered by additional information, and the bids appear to move the market higher.  As was the case on Friday, the best prices for the day for after 12:00, a good 100 Dow points above the open, which of course gives a trader a much more reasonable opportunity to execute an exit strategy.

Another observation.  My Proprietary Momentum Change indicators are all based on trailing price fluctation, using a number of formulas, that when they all come together, and when properly understood, signal a change in market direction. Until the last 2 months, those signals were very accurate, occurring with in 1 or 2 days of an actual direction change.  But the extreme volatility in the market since mid March has been causing the signals to get trapped in whipsaw action, not able to react quickly enough to the rapid change.  For instance, the last buy signal came over a period of 3 days that saw the Buy signal occur in all the major indexes.....including the correlated indexes that properly generated Sell signals.  With the strength of the signals, I felt confident that a move higher was imminent.  IN almost every index, the technical patters also gave every indication that a move higher was probable.  Then after the disappointment of the early part of the week and the decline we saw, by Thursday the market had again set up a pattern in several indexes that indicated a rally was probable.

But nooooo.....The gap open took care of any possibility of a rally and it was clearly time to get out, with timing the exit the only question.  So cash is again what is owned.  Interestingly, the Momentum  Change indicators are back to a position that could generate a buy signal, with out ever actually signalling a Sell.  I think one last observation must be considered, and that is the likely-hood that a market top has occurred, and that the trend has changed.  In that regard, the nature of the Stop Loss orders, that I have been setting very tight, can be more liberal when the preferred position is the short side, yet continue to be very tight on the long side.  Having said that, please be aware gong forward, that with very tight stops in place, and if a gap open is expected against your position, that you should pull your stops and look for a better opportunity to exit the position.

Best To Your Trading!

Bill