Stocks Overbought or Oversold? Where to Put Your Stops

November 1st, 2012 at 12:59 pm

Its 1:00pm ET and volume is drying up.

We did see a nice pop this morning breaking some previous pivot highs from last week and volume looks strong. Long story short… stocks are overbought here very similar to the past two highs as seen in the chart below. The big question from here is what to do now? Well, I wanna see some bullish patterns and volume over the next 12-48 hours if we are going to be looking to get long for an intermediate rally that lasts several weeks taking the indexes to new highs.

Take a look at the 10 minute intraday chart of the past fiveOPEN trading sessions (Wed, Thurs, Fri, Wed, Today) as notice how choppy price has been…. It’s shaking traders up who do not know how to adjust their trading strategy during rising volatility and mixed market cycles. This is something I will be teaching in the near future using my own eSignal trading indicators and Signals as it has been CRUCIAL in the past 3 year to profit from and minimize losses.

SPY Index Trading - Custom eSignal Indicator

 

Daily Chart of my Cycles & Sentiment Indicator of the SPY:

eSignal Indicator Signals

Precious metals are not participating today and even gold stocks are trading lower… Seems people are really focused on pure risk on (equities) today.

Yesterday we saw utilities rally as fear worked its way into the market. Well today utilities (XLU) is trading lower. Interesting how the market move and why I love them so much…

Last week I mention how RIMM looked ready for a major breakout and rally. This week it has jumped over 12% which is exciting. The next to pop looks like KOL coal ETF.

 

One of my members sent an email asking for help and he could not have picked a better time to ask because the market is eating traders alive here…

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MEMBERS QUESTION:

Hi Chris,
In the last week, with the chopping around, I’ve had the bad fortune of being short ES, and multiple times being stopped by a little spike, and then I am watching the market go lower without me.

Last Thursday, I put in a buy stop for 1392, and that got triggered during a spike down yesterday.  This afternoon (I live in Singapore), my sell stop of 1417 that had been set  last Thursday got hit, and I watch in frustration as ES dipped to 1412 without me.

This has been very frustrating and expensive – so I think I really need a tutorial/advice on setting proper stops.

It almost seems like someone can see my stops (set above or below what I measure to be resistance and support) and literally aims for them to take me out.

Some months ago, when this happened a lot, I stopped using stops completely.  Then got badly maimed by the Draghi and Bernanke bounces in September.

Hope this is something you can look at as an enhancement to your excellent service (and I would gladly pay for this).
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MY RESPONSE:
Yes, stops are tough to figure out for sure. If you are getting shaken up as you stated then you are not setting your stops properly. Because of the leverage involved with futures most people put too tight of a stop at or just beyond recent pivot highs or lows… These levels are where the market makers TRY to get the price to reach on a regular basis so they end up with a huge position that is very profitable in most cased within hours. Unfortunately these positions should have been in your trading account and not in theirs.

The market moves on emotions and 95% of traders do not have a clearly documented step by step rule book to follow, which removes emotions allowing them to nail down a consistently profitable strategy and stick to it. While I already have rules for each type of trade setup use last week I took a course to help me fine tune what I have even more so I can pass along how I do things to you.  If you want to build your own documented system properly, then you really need to take Brian McAboy’s “Trading System Mastery” course. It’s a couple short manuals and 4 hours of VERY important step by step instructions on just how to document/create the perfect strategy for you.

Anyways, be sure to keep in mind that during overnight trading (After 4pm ET until 9:30am ET) is when most of your stops will trigger. That is when the market makers can walk the price up and down to these key levels and take your stops.

I focus on my stops only being active during regular trading hours to avoid most of this BS manipulation. While I am subject to price gaps using regular trading hour stops only, I know my risk and I know that an index is not going move more than 5% against me at the open in a worst case scenario. I manage my risk through position size and use wider stops thank most traders because I do not have all my money in ONE highly leveraged position.

I will put together an educational report on how, when and where you should place your stops along with how you can take advantage of it. It will take me a week or two to create but be on the lookout for it…

Learn More at www.TheGoldAndOilGuy.com

Chris Vermeulen

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