Entering Wells Fargo (WFC)

Since our exit signal in WFC the stock has recovered nicely. As is the case with trend following signals, sometimes you sell the lows and buy the highs, it's just part of the game. The purpose of a trend following strategy is not to catch every top or bottom and trade violently. A trend following strategy is designed to catch most of the large rallies and avoid most of the big sell offs. When risk outweighs reward is when we sell and reduce exposure. When the situation is more positive, we buy and increase positions. That's why you sometimes end up selling the lows and buying he highs. It's only when a stock breaks through an important support that you risk a significant part of your capital. When a stock is trending higher and consistently making higher lows is when you are at less risk. It is only when that trend shifts to lower lows that your risk increases substantially. Again, you won't sell at the top or buy at the bottom with a trend following plan, but you will be able to side step large bearish trending markets early on in the transition.

 It surprises most average investors when you tell them the '08 crash took 6 months from top to bottom. Most feel like it only takes one day and all your money can be gone, when that simply isn't the case. Following a simple trend following strategy signaled exits on multiple occasions during that decline. While it is true that most lower lows don't turn into '08 style corrections, the point is when in the moment without hindsight as your guide, you MUST treat every breakdown exactly the same. That way you will know that no matter what, if you stick to your plan you will never get caught in a full market meltdown. And that is how you win with the market; avoid the big catastrophic draw downs to your accounts, the kind you need a second job to overcome. It is not necessary to maintain 100% market exposure to achieve decent returns, as I have shown through our short time together so far. With you always be right? No, and not likely close. If you can lets big trends run and cut losing positions fast, you don't even need to be right 50% of the time and be successful. So be sure to take into consideration the long run. I don't intend on this being a one year blog. I hope to be doing this for decades to come. Stick with the plan and we will see some surprising results.

Okay, lesson over. We have a new signal. WFC has broken the prior swing high and is now looking to challenge all-time highs. There are a couple things to look at here:

First we have a reversal Head/Shoulder pattern triggered with the new higher high. The pattern is smallish, but it suggests a resumption of the prior uptrend. The target is roughly $48.
We also can see Relative Strength confirm the short term trend change.
      
Daily Chart 1-year

Weekly 3-year

On the weekly view, we can tighten up the trend line and add the recent pullback low to our list of significant trend line touches. A good place for our initial stop will be below the right shoulder just about $40. That will tell us the breakout was false, it would break the 20 WMA and uptrend support, and that a longer consolidation/correction is needed.