I know this headline just sounds too good to be true, and nobody could blame
you if you stopped reading right here. Consider this, though: A penny saved is a
penny earned might be a cliché, but its accurate. If your stock portfolio is
down by $1,000, you have to earn an extra $1,000 to bring your net worth back to
even. So a penny saved really is a penny earned. Now ask yourself, How much
money did I lose since the May highs or the beginning of the year? To make up
for the loss, youll have to work extra hours. But what if you didnt lose any
money? You would have preserved your purchasing power and be able to buy at
lower prices (if you so chose). In other words, knowing when to sell a position
is equally if not more important than knowing when to buy. Buying low and
selling high (or the opposite if you are shorting the market) require serious
insight about the market. Here is one simple strategy that protects your profits
and helps you identify winning trades without having a clue of what the market
whether Dow Jones, S&P, Nasdaq or Russell 2000 is going to do next. Below you
will find some actual trade recommendations. The number in front of the trade
recommendation corresponds with the number in the chart. Red numbers were sell
signals, green numbers were buy signals. Blind as a Bat But on Target Bats have
poor vision, but they always find their target simply because they work
effectively with what theyve got. Nobody has stock market radar vision, so we
too have to work with what weve got. We need to identify an edge and exploit it.
Every person may have a different edge. My edge is knowing the S&Ps hot buttons
levels that tend to force the S&P to change trends or confirm a trend (the red
and yellow lines drawn in the chart show some hot buttons). Imagine a car
driving on a long road with a few traffic lights. If the car is going to stop,
accelerate or make a U-turn anywhere on the road, it most likely will be at a
traffic light. If the S&P is going to reverse, it likely will be at
support/resistance. I spend much of my work hours identifying support/resistance
levels. Trend lines, Fibonacci, pivots, sentiment, prior highs/lows, etc., are
important tools to identify such hot buttons. The Big One Like a home builder
that starts out with the foundation and the frame, I start out by building a
rough, big picture outline. The chart below explains why a major market top was
expected. The ideal target range for this top was 1,369 to 1,382. This
resistance cluster was made up of Fibonacci resistances and the upper trend line
of a multi-decade bearish M top formation. 1) (See chart for corresponding
number) on May 1, I confirmed that a move to 1,369 would be close enough to
consider the right side of the giant M-pattern as completed. The very next day,
the S&P spiked briefly to 1,370.58 before reversing. The Roller Coaster The May
2 high was followed by a three-month roller coaster finished off by a meltdown.
There was a temporary bottom at S&P 1,258 on June 16. 2) On June 15: The 200-day
SMA at 1,257 is sandwiched between the 1,255 Fibonacci projection level dating
back to 2002 and last weeks at 1,259. Last Wednesdays low was at 1,261.9. If
this low is not enough, there is a strong cluster of support at 1,259 to 1,245.
A drop into the 1,259-to-1,245 range would prompt us to close out short
positions and leg into long positions. The Curveball 3) Unfortunately, no
strategy is perfect. On July 4, I suggested to short the S&P at 1,340 with a
stop-loss at 1,348. On July 6, I added, If the S&P does spike above and falls
back below 1,347 we will re-enter the short trade. If the S&P stays above 1,347
well watch and wait for a day or so and may go long. However, if the S&P moves
higher the VIX will be around 15. Owning stocks with the VIX that low is a risky
proposition. In a not-so-unusual effort to clear out stop-losses, the S&P closed
above 1,348 for one day before reversing. In seesaw situations like that,
investors need to be flexible and sometimes close and re-enter positions. 4) I
took one more stab at going long at S&P 1,300 and got stopped out at 1,330. To
emphasize, all long positions were closed at 1,330 on July 27. From there on,
the stock market went down hill. 5) I had already forewarned that due to the
potential debt-related down side, aggressive investors may go short if the S&P
drops below 1,325. Forget Your Personal Preference Even if your personal outlook
differs from technicals, its best to stick with technicals. I learned this when
I wrote on July 27, For some reason I still cant get myself to abandon the
prospect of higher prices. Nevertheless, support was broken and the S&P saw a
failed daily percentR low-risk entry today, so well go with the (bearish) flow.
6) Just a day later, the possibility of panic selling became real. A July 28
update: A break below the 200-day SMA and the trend line may trigger panic
selling. One way to avoid missing out on a potentially big opportunity is to use
the 200-day SMA at 1,284 as delineation between bullish and bearish bets buy as
long as the 200-day SMA serves as support, sell if it becomes resistance. If the
S&P seesaws, repeat the process. New Lows or Not The big question is whether the
decline is over and done with or if there will be new lows. Based on various
patterns, such as the 2007 market top mirror-image, VIX topping pattern, market
bottom patterns and sentiment, the low doesnt seem to be in yet. But I trust
technicals more than my personal bias. 1,173 was major support. Tuesdays update
recommended to go short when the S&P violates 1,173. As long as the S&P stays
below, we will be looking for lower prices. Worst-case scenario, were proven
wrong and have to close out the positions without net gain at 1,173. Ideally,
well get to close out short positions once the S&P reaches our downside target.
This approach to investing isnt foolproof. But allowing the market to establish
support resistance levels along with incremental trading ranges makes it
possible to maximize the gains and minimize any losses. This article is brought
to you by ETFguide.com. ETFguide is the information leader on exchange-traded
funds because of its vendor-neutral approach and its progressive reporting
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