I also recommended going 50% long Hess Corp. (HES) at $54.42 and 50% long at $53.66 with a stop at $51.28 (risk of approx. 5.1%). HES had closed at $55.62, which was just above its downtrend, line d. The stop ((line 6) was placed under the late October low of $51.60 as well as the late September low of $51.87. The 38.2% Fibonacci support was at $50.60 but the risk was too high using a stop under this level.
HES reversed sharply the following day (line 5) and hit both buy levels as the low was $52.82. Two days after it was recommended, the stop was hit and five days later HES had a low of $48.20. At this price the loss would have been doubled from 5.1% to 10.8%. Clearly using a stop under the 38.2% support would also not have helped as the 50% support at $48.51 was eventually also broken.
In the article I also recommended the Select Sector SPDR Energy (XLE), which was stopped out for an approximate loss of 3% while the position in Marathon Oil Corporation (MRO) is currently up about 2.8%.
The most common mistake many make is to use a stop just under what appears to be an important low instead of looking further back in time for a low fewer are watching. The recent action in the Semiconductor HOLDERS (SMH) provides a good example. SMH made a low of $30.34 (point 3) on October 23. SMH then rallied sharply and came close to the resistance at $32.50. Those who were looking to buy SMH on a pullback may have used a stop 0.5% under the October low at $30.19 or 1% under it which would have been at $30.03.
SMH started to drop sharply on November 14 and on November 16 dropped in early trading to a low of $30.00 (point 4). The candle chart shows a hammer formation that day (point 4) as SMH closed near the day’s highs at $30.51. I am sure that there were quite a few who were stopped out on this intra-day selloff.
A better alternative would have been to look at the June 4 low of $29.57 (point 1) and the July 17 low of $29.56 (point 2). This support by November was much more important and if it was violated it would have been more significant. When making a recommendation I do try to determine where the majority may place their stops and then look for a different level.
These examples, I hope, will further illustrate that stop placement is more of an art than a science and that it is a skill that is acquired over time. They also illustrate that while my stop placement worked well in some of the cases, there was plenty of room for improvement even after 30 years in the markets.