Here’s a trick that Scott likes to use to stay on the right side of risk in the market. $SPY – November 10, 2021SPY
This is Scott with your Chart of the Day. I want to share a little trick that I use to help me stay safe in the market. This doesn’t work all the time but it does work most of the time and I like to just use probabilities when I am trading.
What I like to do is, if I am an active market participant I like to keep an eye on where price is versus the 8-day exponential period moving average, that’s the orange line here on the chart. Typically, if the overall market, like the SPY ( NYSEARCA: SPY ) here, closes below that 8-day exponential period moving average I like to kind of error on the side of caution in terms of my portfolio.
Maybe that means that I am not fully invested in the market. And a lot of times what you will find is, if the market is closing below that 8-day exponential period moving average you can kind of get pushed out of some of your stocks. And maybe those are stocks that you have a good cushion in and maybe you still want some exposure so maybe you don’t sell it all but maybe you are taking some off the table, and again, just kind of respecting risk.
What I have found is, anytime the market, like the SPY ( NYSEARCA: SPY ) here, closes under the 8-day exponential period moving average, even just in recent history, look at what can tend to happen. Now, you can ignore these lines, these are just temporary support and resistance levels I was watching, but if you just pay attention to price and where it is in terms of to 8-day when we have trouble staying above that 8-day exponential period moving average we can typically be in store for a little chop fest.
I don’t like my portfolio to be choppy. I want velocity in my portfolio but typically only to the upside. So I like to ride that upside momentum when the market is above the orange line, that 8-day exponential period moving average. When it gets below and is allowed to close below that 8-day, again, that is when I am kind of usually getting pushed out of some stocks and just respecting risk a little more.
A lot of times what you can find is, if the market does close below the 8-day, sometimes you will get a little base of consolidation under the 8-day, and then you can define your risk with a move above using that base. And so that is what I would do here on the market, just kind of wait for a little bit of a firm up here around the 8-day exponential period moving average. Or, a little sideways base of consolidation on this nice move that we’ve had in the last month or so with the SPY ( NYSEARCA: SPY ).
So just a little trick that I like to use, watch price in relation to the 8-day, and if we get a close below that 8-day exponential period moving average a lot of times it will push me out of stocks and I want to respect that risk.