Stubbornly defending what you believe to be right in the face of harsh opposition is an admirable quality. It takes strong inner fortitude to enable someone to not be swayed to and fro by the opinions of others.
As admirable as this quality can be when dealing with others, it is possibly one of the WORST traits you can have when dealing with the market. Allow me to explain.
No matter how smart you are or how much research you do, there is no way to be right 100% of the time. The only reason you buy a stock is because you believe it will increase in value. However, before you put one penny at risk make sure you know where you will cut your losses. If your trade gives you your predetermined sell signal, have the humility to admit you were wrong. Don’t be stubborn. Don’t rationalize. Don’t hold and hope. Hit the eject button and sell. Yes it sucks to book losses, but it’s not worth the risk to continue to hold. If the stock is any good it will setup again and give you another buy signal down the road. If not, you can watch it implode from the sidelines.
It makes sense and sounds easy to do when talking in the abstract, but the fact is, even billionaire hedge fund managers can be prone to stubbornly digging in their heels when they have a trade going against them . Case in point: Bill Ackman of Pershing Square Capital Management and his dogged determination in defending one of it’s top holdings, Valeant Pharmaceuticals (VRX).
In fairness, being a “contrarian” has always been a part of Ackman’s shtick and he IS a billionaire, but wow, from a distance this looks like pig-headed obstinance on a grand scale. When VRX got cut in half from August to October 2015 Ackman doubled down and increased his stake. Then, earlier this year when VRX was hovering around $90, he added to his position again! Now after another bloody week. VRX has just one tenth of the value it had seven months ago.
there has to be a sell signal in there somewhere!
I know that there are many different ways to make money in the market, but WE NEVER ADD TO LOSING TRADES in the 821x system. We take our loss and move on. Why would we want to tie up fresh money in a down trending stock?
As Bill Ackman can attest, stubbornness when trading can be quite expensive.
"If I believe that I am right, I will take it to the end of the earth until I am proven right."
- Bill Ackman
Yes, the market is still in a primary downtrend. The S&P 500 is still below a DECLINING 200 day moving average. The lower high and lower low that I mentioned a month ago is still very much intact as long as the S&P 500 stays below 2,116.48. The spirited rally that the market has enjoyed since February 11th doesn’t change any of this.
However, there is an interesting technical chart pattern worth watching now and keeping a look out for in the future. In the last six months, the market has made two pronounced and tradable “W” formations also called double bottoms. These are bullish patterns capable of delivering fast gains.
The measured move of a W formation is calculated by adding the height of the W to it’s top. I calculated a conservative height that ignored the “tails” of the daily candlesticks as well as a more aggressive target including the full height to draw in the rectangular “measured move zones” in the chart below.
two bullish w’s in a bearish market
As you can see, the first W did just barely reach it’s measured move target zone before running out of steam. IF the current W follows suit, that’s good for at least another 50 points in the S&P 500!
There are a couple of ways you can you play these bullish patterns when you spot them, even in a bearish market. First, you can just simply buy a tradable index ETF such as SPY. Both of these Ws featured picture perfect 821x buy signals as they finished forming.
Another strategy you could take is to seek out and purchase stronger stocks as you see this pattern developing in the S&P 500. That’s what I did in the model portfolio. Stocks such as RYAAY and COKE are out-performing the market, holding up above their rising 200 day moving averages. The idea is that, if the downtrend in the S&P 500 resumes, which is likely, these stronger stocks will hopefully not get hit as hard as the market as a whole.
One thing that would be absolutely foolish to do is to complacently buy without a plan, thinking the market HAS to go another 50 points higher. The market doesn’t HAVE to do anything. The measured move calculation is just a POTENTIAL scenario to be aware of.
Regardless, it is worth keeping an eye out for these patterns. We all know that you can never have too many W’s in your trading account.