Pop Quiz…or Final Exam?

Market Thoughts: Hey Team. While Friday is my “day off”, it is actually the day that I work on the Weekend Update without distractions. I get a lot done on Friday — both assessing my trading positions (tickers and size) as well as figuring out where to go in our analysis, trading, etc.

But I wanted to pop in and mention what I am seeing.

Every sector is down today. Every single one. Also, if you go through the various sectors, you will see most/all of them simply falling back to support.

E.g., look at the SMH. It is falling back to the 50-day moving average, which has typically marked the bottom of the trading range.

I just wanted to remind you that “testing” support is just that — a test. And a test can be passed or failed.

So as I look at these pullbacks, I see a heightened ability to define risk! This is what I’ve been saying for quite a while, but I am always concerned that many members simply hear what they want to hear rather than what is being said.

Soooo….I will say it again.

When I say that a stock is “letting you in”, I am saying that the stock is pulling back to the bottom of a defined channel…to support…to that key level where, if it breaks down, you know you are wrong to be long.

In essence, “letting you in” means that you have an opportunity to define your risk.

“Defining your risk” is not synonymous with “buy now and make money”.

So please, please, please make note of the difference. I say almost constantly that we look for pullbacks to support, but we do not buy until we see sufficient buying to turn the stock upward and allow us to put in a prudent stop.

What’s the analogy I use? The foxhole! I say that the first one out of the foxhole always gets the Medal of Honor…posthumously. While that’s quite an honor for the brave soul who gets shot as he charges the bayonet line, I’d rather hang back, keep my head down, grab another cup of joe, and pop out of the foxhole when I have a pretty good idea that the bears aren’t out there playing “Whack a Mole”.

We don’t know whether support in so many of these stocks will hold…or not. Look at Google, for example. Sure doesn’t look particularly good to me, and if Wednesday’s intraday low does not hold, I’ll kick that ticker to the curb faster than a drunk blind date who just spewed on my dashboard.

So don’t get complacent and assume that support will hold. Nor should anyone be sitting there like Bambi staring into the headlights of an oncoming truck at midnight.

Be prudent; be proactive; be a Risk Manager!!!

Note: By the way, I am not making this post in response to anything anyone has written. Haven’t even read the forum thread today. But after teaching and mentoring traders for more than 10 years, I can typically sniff out those times when some folks might be sitting there in quiet desperation wondering what happened…and/or wondering what to do.

If you are getting whacked by the bears, do not give up. Do not give up on yourself, and do not give up on other members here, and do not give up on me.

I can tell you that there are many members that are likely sitting here today saying, “Cool! I got stopped out of all my trades and protected most [never all] of my profits. Now I’m sidelined with a ton of cash. Burn baby, burn!!!“

This is what we do here.

I’ve heard from many members throughout the past year or so, telling me about their trading development. Some share their successes in the Forum, others do it privately. But many, many members come here knowing nothing, taking risks without knowing about risk, being clueless about why they are buying and what they should be doing after they bought. But over time, they come to understand that the time to buy a stock is when it is close to the “oops, I’m wrong” level…and if the stock is NOT close to that level, then they do not buy the stock. It’s as simple as that.

If you can’t come up with an acceptable definition of risk, then you just don’t buy the stock! Period! Consider it a missed opportunity. Now, go look for the next one. Perhaps the stock might come back to you and give you an opportunity…but until it does…then it is a missed opportunity.

Make sense?