Q: Hi Kevin - In your video the other night you said you didn't necessarily use a MA for a stop. I haven't kept one on either but how do you decide to get out? This drop feels different but that's because I may be listening to too many Twitter warriors. I know you can't offer specific advice but for something like this do you just look for an overall change in the market or is there a threshold that you do like to use. Thank you.
A: Xlnt question. In Thursday's video, I said I would exit part or all of a position based on a close below the 9 ema. Friday, I fully exited AMZN and SHOP, and exited most of TQQQ (purchased in October) based on what were going to be closes that day below the 9 ema. The only one that did not close below the 9 ema Friday was TSLA, and this was left intact. This left my less-aggressive account at 94% cash and my more-aggressive account at 75% cash over the weekend. Today, Monday, after the market's morning rally failed, I exited TSLA and TQQQ. Currently, I only hold some exposure to the gold mining group.
Underlying this discussion is the fact that stocks take the escalator up and the elevator down.
When the Nasdaq runs for a while and there becomes very few pattern setups left to exploit, I begin looking for the pieces of evidence to fall into place that indicate a market turn lower. In this case, Thursday and Friday saw two down days on the largest volume for a down day in five months. This represented a change in character and was the evidence to tell me to reduce exposure.
(Waiting for a close below the 20 ema before taking anything off was not an option. Enter the 9 ema. Taking some off on a 9 ema violation is a sensible plan given that a break of the 9 by a strongly-trending stock often quickly leads to a break of the 20. Locking some in at the 9 acknowledges this. The worst thing that could happen is that I reenter a position if proven incorrect.)
We saw this same phenomenon play out twice last year. In July 2019, the Nasdaq was advancing, but I was growing cautious as noted in reports back then due to a shortage of pattern setups. In late July, the Nasdaq peaked and went into an 8.4% intermediate-term correction. Another instance of this was in September 2018. On Oct. 2, I went to 100% cash based on the action of the names I was holding and tweeted about it the following day. This began a 23.9% October-December bear market.
My understanding of short-term (not intermediate term) price movement, which allows for ease of reentering a position if taken out prematurely, makes this a viable approach for me and my unique makeup as a trader (temperament, risk tolerance, experience, etc). I would not necessarily suggest anyone adopt this unless they are real comfortable with reentering a position without having to wait for a new base, 50-day touch, 3 weeks tight, etc.
For most traders, including myself, the best solution for exiting a winning position is using intraday breaks or end of day closes below the 9 ema, 20 ema, and for a bigger winner, the 50 ma. It is logical, it is objective, it is easy to follow, it removes emotions, it is based on trend and momentum, and it works.
Perhaps the most important thing to recognize about exiting a winning position is that no one does it perfectly. A trader should not beat themselves up over it.
I hope this helps.
For intraday ideas and analysis: https://twitter.com/mardermarket