No matter how wonderful we think price, time, and momentum can fit together, some things just naturally go awry.
Take a look at Cooper Industries (COO) on 11/10/2006, even though the nets were not quite all that impressed with it. It showed up again today on another screen.
As I mentioned in the room, COO at that time looked as though it was trading in a channel and perhaps putting in a head and shoulders top.
Take a look at Chart COO. Let’s analyze it.
On the reversal screen, the stock would have been picked up (if the nets liked it) right at the 0.618 retracement of that previous day’s low combined with the early 11/13/2006 high. As the day progressed, the cfg indicator would have crossed, signaling the possibility of an intraday reversal, and allowing one to take a small profit on the whole position and leave, or sell half and moving the stop to 52.85, which is the lowest low of the previous move before the momentum reversal.
Well, after a couple of weeks, if one had decided to hold the trade, it would have been stopped out on 12/5/2006. If the wide stop had been held, then the loss would have been (say on 1000 shares), 53.50 less 53.11, or $390 plus commission. It seems like such a horrible pain to take such a loss. Why do we have to live with these kinds of stops?
The answer is that one does not have to live with those stops. If momentum begins to turn, there is ample opportunity for the small profit. But stops should be wide enough to allow everything to work without killing the trade. But why use stops at all? Can’t you just use…a mental stop?
Go look at COO. again...
Sure, it had all kinds of retracement convergence points and Fib clusters, but what even Mr. Fibonacci, Mother Nature, or the masters of the universe cannot predict is…THE IMPACT OF NEWS!
Just as Bauch and Lomb found out a while back (and this company has a local lens facility here), COO is now in a business is hyper-competitive. Institutions understand how margins can be quickly undercut, which is why they sell fast on the news. COO has been one of the more or less spotless “growth” performers in the business.
However, COO is not considered one of those “growth” performers anymore.
The impact of lowered sales and sales delays was devastating. Anyone using a mental stop is probably ready for mental rehab. Knowing when a position is dying is half the battle. This kind of trade is a daily example of what one could consider a duration-directional trade. If a stock has not moved substantially away from a buy or sell point consistent with swings in pattern analysis using IPDE principles. It is sooner or later time to pull the plug.
The other thing to realize is that news makes stocks orders of magnitude more dangerous than futures in swing trading. In Commodities, surely, you can be damaged by a limit down or up day against your position. In currencies, or index trading, news can blow out your stops.
If a stock has bad news, however, you ENTIRE POSITION CAN EVAPORATE.
One of the reasons I trade baskets of stocks is that this kind of thing can happen, and happen at any time. One of the reasons I am so conscious of cashflow values (as squirrelly as they can be) is that if one trades a stock long at valuations that approach even the semi-ridiculously high, this kind of thing can be the results.
Mental stops with stocks are for the mentally ill (or for those who will be shortly once one experiences this kind of a disaster).
Such is the nature of equities, and why equities can and will violate all laws of technical analysis (and general civility) at a whim.
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I believe you are probably the best out of the literal hundreds of traders that I have witnessed.
