You can’t make profit, if you don’t take profit.
It’s an old, corny saying that traders sometimes use. Yeah, it’s cheesy, but it’s also conceptually true. To be long-term successful at trading, you have to manage the art of knowing when to book profits and knowing when to let it ride.
And unfortunately there’s really no mechanical, never-fail process. Seasoned traders know that more often than not, whatever move you make will be less than ideal, or even outright wrong.
In my case, I try to take as much emotion out of it as possible.
I began noting the negative technical divergences and chart risks building in the SPX a few weeks ago. It was too early to trade, but not too early to start thinking about exit situations. That’s normally the best time to think about a trade. Plan ahead and execute if/when the situation presents itself.
I wrote several times here and in my twitter that the market was getting overbought, sentiment was becoming consensus bullish, and momentum technicals were showing negative divergence on the daily charts. At the same time, the market hadn’t broken any support and was still pointing higher on a weekly basis.
So my plan was to note the short-term bearish factors and wait for a catalyst, specifically a trendline break. Make it mechanical and wait.
We finally got that signal this week, with a break of the daily trend. On that trigger, I took profits on a good chunk of my longs. Long-time followers know that some of these longs were bought and added to at both the August and October bottoms almost to the day. So they were monster trades.
I’ll likely be looking to exit the rest of the position and look at things with fresh eyes this week, possibly as early as Monday or Tuesday. On a weekly basis, we’re now in Week 5 of this bullish MACD move, so this is normally when I start looking to play the odds and step aside.
And I probably don’t have to say, I’m still no where near intermediate-term or long-term bearish. I’ll again look to buy any significant dip. And I still don’t expect any correction more than 10% any time soon.
5 THINGS ON MY MIND
1. Here’s a little more detail on the daily chart that triggered my sell. The chart did just enough to signal me to take some profits – broke the daily uptrend, coupled with a little dip into a slowing MACD formation. The trendline was recovered on Friday, but we’re now facing some sort of resistance which might cap this rally in the near-term.
2. When booking profits after a nice run, the biggest hurdle most traders have to overcome is Fear of Missing Out. I’ve often said that FOMO is the underestimated most dangerous factor in trading psychology.
Even if the breakdown that I sold was a fakeout and there is follow-through to the upside, I can control my FOMO and just watch.
3. I was anticipatory in buying the bottoms in August in October – I bought when there were no clear buy signals quite yet. I was playing the odds and making a bet on sentiment. Any selling I do this week is in that same vein. The charts are still mostly bullish, with the negative divergences not quite confirming yet. So I’ll probably be early.
But the chart is set-up where if there’s downside, it could be a tradeable down move. Sentiment is definitely set up for that. Think about the sentiment of most traders today. Most are expecting minimal pullbacks, a Santa rally to come and generally have higher price targets. There is not the kind of fear and skepticism I normally like to be long in.
4.Don’t confuse selling with being bearish. I see a lot of traders see someone selling or profit-taking and think it’s a sign to get short and expect some sort of big move down. Clearly, I’m not bearish and wouldn’t be surprised by a continued rally. I’ll just keep watching and staying flexible.
5. Bitcoin is now firmly in the zone of a few levels of support. This is mildly bullish action in my view – a fierce breakout from the bottom that has now lazily pulled back for weeks into an area of support. Technicals haven’t turned up yet, but you can see how any kind of move up would pull them higher. I’ve been adding.
A CHART THAT CAUGHT MY EYE
TSLA – Tesla
Being short anything is dangerous in a bull market.
But if you’re a trader you’re always looking for trade set-ups and reward comes with risk. So when I do see interesting short targets, I’ll look for pretty clear trade set-ups and stop-out levels to manage the risk.
On a fundamental basis, TSLA is a controversial stock that bulls and bears are passionately emotional about. I see both sides of their arguments, and have traded TSLA both long and short.
Today, TSLA is a stretched chart that broke its very steep uptrend support line and re-tested the line from below.
Short-term significant negative divergence has built on the daily charts. We’re also right at some resistance from a previous important high earlier this year. I like this trade because we have a clear stop out level if it breaks back above last week’s reversal high, which limits our risk.
Strategy: Short here for a quick scalp. Stop is last week’s high at about $356.20.