The recently introduced 52-week strategy has reached an interesting juncture, writes Ian Murphy of MurphyTrading.com.
An entry trigger occurred on December second (green vertical line) when the 52-week indicator closed above the zero line for two consecutive weeks (circle). This strategy uses a soft (mental) protective stop where the trade is closed out if the price finishes the week below the -1ATR line (arrow). That means a decision is made every Friday to exit or stay in - and today is Friday!
In a note to Subscription Clients on December fifth, I highlighted a 50% retrace of the trigger bar (dashed line) and said, “If it is breached, think of it as the first warning sign that the trade is not working out.” A 50% retrace almost always holds as support in successful triggers, but yesterday the retrace line was breached following a bearish reversal bar, and ahead of the open of the regular stock market session, futures of the S&P 500 (SPX) are trading down about 1%.
So, the question is, do we close out early in today’s session (or yesterday's as some Clients have already done), or do we stick to the plan?
Let’s Look at the Options:
- Close now at $45.83 and take a smaller loss than originally planned
- Wait for a close below the -1ATR line which is currently at $43.38
In option A, we are closing out the trade now, but we are also closing out the chance to profit if the price reverses in today’s session, something which has happened many times in the past. In fact, this is the reason we use a protective stop on a ‘closing basis’. Also, a washout reversal at the -1ATR would be a picture-perfect first higher low pattern for a bullish trend to develop.
In option B, if we hang in until this afternoon to see where the price goes, it might recover, but it might also go deeper than the -1ATR line and we might lose more than we had planned.
These are the options, and these are the consequences, what to do?
There are no easy choices when trading and investing, and it’s often a case of choosing the least bad option. Personally, I would wait for this afternoon to see if the price closes below the -1ATR line. Remember, the most profitable trades are frequently made at the point where the risk is highest. Besides, if the trade doesn’t work out, we are still within our allocated risk (or very close to it) because we should have used the correct position sizing when we entered.
If this doesn’t work out it will be the third rally that attempted to break the bearish trend on the S&P 500, and the longer the downtrend goes on the more likely the next bounce will end it. Accordingly, we should take all valid triggers on this strategy from now on.
Learn more about Ian Murphy at MurphyTrading.com.