Avoid Serious Losses By Following the Rules

Another hectic week for stocks is behind us, and more than a few investors have been left scratching their heads. Remember, it’s only natural to get frustrated in a market like this.

Don’t think that anyone – present company included – is immune from the frustrations of seeing portfolio positions dip or watching as the S&P 500 sells off for yet another consecutive day. But stock market frustration only becomes a real problem when it starts to interfere with your decision-making process. Now more than ever, it’s crucial to follow your preset trading rules, and stick to the system.
Whenever you enter a trade, you should go in thinking about your exit plan from the start, whether the stock performs as expected or it doesn’t. Those two price levels need to be dictated by predetermined analysis, not by how we feel about the market; when used to guide your trading, they can spare you from premature selling.

It’s all about having perspective. With the right context for a stock’s move, suddenly sell-offs aren’t panic inducing. Today, I want to share some of the market context that my Penny Momentum Trader readers have been benefiting from:

I’ve been putting a lot of emphasis on the technical significance of the 1,300 level in the S&P 500 since late 2010. So, can you guess where last week’s sell-off stopped?

That’s right. Despite some flirtations in the mid-1,290s for around 20 minutes on Thursday, the S&P held up above our technical support level nearly perfectly. Remember, it’s important that the market is following our technical cues – it means that last week’s price action is probably just a healthy correction, and that our cautiously bullish outlook for the near-term continues to hold. Even though we were able to pin the market’s “floor” within a few points, I want to stress for newer members that we’re not in the business of making predictions here. As technical traders, we’re focused on contingent expectations – a framework for trading that’s based on if/then rules.

If the market stays above 1,300, we’ll continue to be cautiously bullish…

So that said, what would we like to see as we enter the first week of March? Ideally, we’ll get a bit of sideways consolidation in the S&P 500 this week as the market cools off from the rollercoaster ride we’ve just endured.