Hey there traders! Its Jack here, coming at you from thestockbandit.com. Welcome back to another video trading lesson.
Well, if you watched your screens today it was hard to miss the action in many commodity stocks, particularly, in metals and mining sector. They truly were the story stocks of the day and they offer a great lesson which I didn't want to pass out. Fortunately, I did not have any possessions in the stocks, so this was an observed lesson rather than one learned first hand. And by the way I have had plenty of those too.
Today, this group started without any unusual activity, but the selling pressure quickly arrived and never lead up. Many of these closed at or near their session loss after seeing massive declines on big volume. What is so interesting is that this group has shown such leadership in spite of the broader market weakness in the past several weeks.
It was one group or many traders found refuge from the over all market correction, allowing them to continue trading along side as these up trends just continue to persist. However, even in stock showing relative strengths, some method of taking profits must be employed. There is ongoing debate regarding stop loss owners and how much help they offer versus how much harm they cause.
Well, today's lesson addresses that headline and it is pretty obvious which one wins out. So as I mentioned these stocks were about to cover, and they have shown a lot of strength in recent months. They have been in well defined up trends and it has made it very easy to determine when the party is over.
Well, today's action in the stocks suggest a big change of character. But let's take a look at the some of the tactics which many traders could have used to prevent a lot of paying. The first one is the most obvious; it is the up trend line. Up trend lines not only provide support on debts within up trends, but they also mark the pace of the events.
Today we saw a number of up trend lines broken in the metals of mine groups, such as Cleveland-Cliffs. That up trend lines stood at 106 and the stock closed at 95 in change. US Steel had an up trend line that was broken on Tuesday at the 177 level. So that's a considerable distance above today's closing line. CNX had an up trend line which was broken at 106.50, more than $10 above today's closing level. Arch Coal had an up trend line that was broken at 70 and a quarter so that is more than $8 above today's closing level. Schnitzer had an up trend line of 102.50 which is more than $7 above today's closing level. And finally Fording Canadian Coat Trust had an up trend line at 88.30 which was broken some $7.5 above today's closing level.
Now clearly these longer term trend lines offered not only a game plan for an exit but much better exit levels that mini traders settle for today. Now another tactic which could have been used is the conformation of a lower high. As up trends start to falter, a last gasp move often occurs which is unable to attain previous levels thus creating a lower high and a possible change of trend. PCX confirmed a lower high today after a parabolic run.
Now a recent debt was followed by a bounce which fell shy of the previous high. And that's been outlined to you on the chart with a nice elliptical shape shading that lower high area. And then today's break of the previous day's level low confirmed that lower high. This signal would have come at 147 and a quarter, more than $17 above today's close.
And finally, another common axis strategy which traders of these stocks could have been using as some kind of a safety net or bail out level is the penetration of a short term moving average. Even a simple 15 period moving average would have offered a nice exit plan for allowing these stocks. And a 15 period is just a 3 week running average where prices have been closing each day. That could have offered a much better exit on the stocks than what traders ultimately settled for, and that would have definitely prevented a lot more pain for them, and they would not have taken near the beating that they did.
So let's take a look at the few of these. Foundation Coal had a moving average of 15 period moving average, broken at 81.10, and that's $2.5 above today's closing level. James River Coal had a 15 period moving average, it was broken at 54.76, that's over $9 higher than where today the stock finished. And this one also had a lower high which was confirmed today. So that was a stock that offered a couple of these overlapping conditions. And then finally, Massey Energy Company, MEE had a 15 period moving average which was broken at 87.33, and that is over $12.5 above today's closing level.
So today's trading lesson is very obvious. Even if you are trading stocks which has established nice up trends and they have got plenty of relative strength, remember that the party could always end unannounced. Keep some kind of safety net in place as a last cutting measure, whether trend lines, monitoring lower highs or even simple moving average penetration.
When the signal arrives to jump ship, don't even think twice, just bail out. You will probably prevent a lot of additional pain. That's it for the day, trade well out there, and I will you soon.
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