Something I've been working on recently, and mentioned a few newsletters ago, is the middle part of managing my trades. Specifically, what I'm doing after I enter a position and how I'm assessing whether to hold, take profits, add, or exit.
For example, if I'm holding a trade and price is approaching a key level, what's the probability of a bounce or rejection? Would it make more sense to close the position and look for another entry, or continue holding through that area? Questions like this tie into preparation in general, because there's the work I do before entering a trade, but then there's also preparing for what comes next.
For me, preparation starts with reviewing the general market to get an idea of what could develop over the coming week. From there, I go through the basket of stocks I trade and look at where each one is in its price cycle, where price is trading relative to key levels, and what the next likely move might be. This gives me an idea of what I'm looking for, and then I can start defining what I need to see before entering a trade.
Once I'm in, I'm actively assessing price as it develops and making decisions based on that information. But I can also prepare for those decisions by thinking through the different scenarios ahead of time. Especially when I'm holding trades for multiple days, because quite a bit can happen overnight.
A few questions I consider as I'm managing an open trade:
As price approaches the next key level, will I hold, take profits, add, or exit? Would it make sense to close and look for another entry?
If my position gaps in my favor at the open, will I take profits immediately or give it more room?
If price gaps against me, what will I need to see to continue holding, and what would prompt me to exit?
If price starts moving sideways or isn't making progress after a few sessions, does it still make sense to hold?
Where would I consider adding to my position?
When and where would I consider moving my stop loss?
How much room will I give price, knowing that even if the stock recovers to a previous level, my option may not recover to the same value?
I want to consider different scenarios along the way, and as price develops, I want to respond to that information. The goal is to stay present with price, continue assessing what's happening, and be prepared to make the next decision.
Resources and how to work with me:
Market Review and Outlook
Something I keep tabs on is where price is trading in relation to the daily 50 SMA. This is not a hard rule for me, but if price has been rising and then starts undercutting the 50, then I note this. And if we’ve been in a range for a while and price starts to stay under the 50, then I note this as a sign that the structure is starting to tip and we could see a further decline. This is not set in stone, and there are other things to fold in, but I find it useful to my analysis.
I’ll reference the 50 SMA a few times below, so I wanted to explain why I bring it up. For me, it’s one of zoomed out pieces I look at, ie how price is interacting with the 50 SMA and where it’s trading in relation to it.
Dow Jones
The Dow slowed its decline this week and rallied back toward the daily 50 SMA before pulling back on Friday. We could see some digestion of that rally, and that move up could just be a retest into the moving averages before another leg lower.
DOW Daily Chart
Levels:
51,617: First area below. Price could test here and hold, spend some time around it, or continue lower.
50,492: Larger level underneath if the decline continues.
53,281: Next level above if price turns back up and continues higher.
Nasdaq
Nasdaq sold right back into its range last week. Price is already getting close to the bottom of that larger range around 25,783, so now we look to see how it starts acting around there.
We have undercut this area before, so a move below it by itself does not mean a sustained downtrend. If price holds around here, we could rotate back through the range again. If selling continues, there are a couple of levels underneath to assess.
Nasdaq Daily Chart
Levels:
27,300: Upper part of the larger range.
25,783: Lower part of the current range.
25,018: Next level below if selling continues.
24,443: Lower pivot underneath that.
S&P 500
SPX also sold back into its range and is now sitting near the lower part of it. It has undercut the daily 50 several times over the last few months and recovered it. If we start spending more time underneath it after being range-bound for this long, this gets noted because the structure could start tipping further down. At the same time, we’re still in the range. A move toward 7,500 would be lower, but it would also be an area SPX visited last month.
SPX Daily Chart
Levels:
7,815: Upper end of the larger range.
7,629–7,582: Lower area SPX is testing now.
7,506: Next level underneath if price continues lower.
7,314: Larger level below that.
For now, we’re back to working with the ranges and the levels inside them. Luckily, as short-term traders we don’t need to predict where the market is headed months from now. We can take it week to week, see how price responds around these areas, and reassess from there.
Resources and how to work with me:
