Know Your Levels

Don't fret, don't fear, don't stress. Some things are simply out of your control so don't bother yourself trying to control them. For all you control freaks out there you are simply going to have to improve that part of yourself if you want to manage your own money successfully.

So what's happening this week that has everyone so worried? Well it appears that tensions are rising in Iraq again as radical insurgents are taking over many Iraqi held cities. President Obama has discussed the possibility of providing some "help" against this invasion. What does this mean for the stock market? Potentially a fear inducing panic, possibly the end of the bull market, possibly just a buy-able pullback. Simply put we don't know what it means for the markets, the US or our portfolios.

Since we can't know the future, what can we do about it, really? We can drive ourselves crazy and start to invest on the whims of news headlines out of Washington, or we can maintain our focus on what we can control which would be at what levels our current trades are proved invalidated. We want to dig out our "lines in the sand" charts again and see where we will no longer be in breakout mode and where we will need to switch to a more defensive positioning.

To begin this exercise let's line up our two primary market indexes, the SP500 and the Russell 2000. This will give us a good view of the broad market watching both the large and small cap stocks.

SP500 Daily chart

 By just glancing at the the SP500 you can see we are still above the prior resistance levels and are in breakout territory. The first warning signal will come from the prior resistance area failing to hold as support on any retest. For the sake of simplicity we are going to call anything above 1,900 full speed ahead. There will be no need to touch anything as long as the market is above 1,900. The most recent swing low on both the weekly and daily charts is 1,870. That should act as a strong support and I would expect a healthy market to not fall below that level. After that 1,815 would be a full trend invalidation point and set a lower low. So regardless of Iraq, Washington, or the economic data, the levels to watch are:

1,900 = Full bullish mode
1,870 = Swing low and significant support
1,815 = Trend invalidation for the uptrend, major higher low in long term uptrend


Russell 2000 Weekly chart

The Russell small caps is a bit more messy in that it hasn't yet made a new high along with the other market indexes. It is still showing longer term relative weakness and really the only two points we care about are the prior all-time highs at 1,212 and the major support at 1,100. Between those two points, the Russell 2000 is pretty much in no man's land and until a move comes above or below those levels we don't have too much to think about.

1,212 = Prior all-time highs, full bull mode above those highs
1,100 = Long term trend support, below this there is big trouble ahead.  


Aren't you glad you have spent the last few days chewing your fingernails down to the nubs?! I just took all the anxiety out of the market in two paragraphs. This is how you need to think in order to manage your's and other people's money. You need to be cold and calculated in your risk assessment. There is ZERO place for fear and emotional reactions to news events in the markets, everything can be broken down to simple levels of risk management.

Lets zip over our current holdings (7 out of 10 watch list stocks we currently hold) in a similar manner to determine where those key levels are for our holdings.

In order of total position size:

TLT

For being in a situation where Bonds could easily fail, TLT couldn't even get a trade below $111 this week. This was impressive to me seeing that kind of demand still after the recent 6-month rally. The story is still the same as last week but we did see the RS trend bounce nicely off of trend support and that provides some clue as to the continued strength in TLT. We want to maintain our exposure to TLT as long as price is above $110 and the RS trend is above trend support.

WFC

WFC continues to trade at all-time highs. Some could say that this week's action (making a new high but closing below last week's high) could be signaling a top for prices. But we don't try to pick tops here and would need to see some significant and sustained downside pressure to shake our resolve. Above the 18-month uptrend support WFC is good to go. Stops would come into play near the $48 area.

PPG

PPG continues to make all-time highs and is in full breakout mode. RS trend support is intact as is the price uptrend. We want to hold PPG above about $195 which would have to break both the uptrend support and rising 20 WMA.

AEP

After being smacked down early in the week, AEP once again found strong buyers near the $51 area. This has been a recurring theme as there seems to be a solid support base forming at the prior all-time highs. Above trend support, the rising 20 WMA and the breakout inflection level (green line), this is still a stock to own going forward. Stops should be just below $51.

F

Ford is getting off to a bit of a rocky start after announcing some adjustments to many of their top new models' fuel economy numbers. These headlines, while notable, should be kept on the sidelines from your assessment of the strength of Ford's stock price. As long as shares can hold above the $15.50 swing low and rising 20 WMA we will want to defer to the uptrend.

CMI

CMI moved to a new high this week and still seems to be headed toward our $164 base target. A pullback here would make sense, but as long as price can stay above $146 I feel the trend is intact and healthy. We will need to watch the 20 WMA and current RS breakout for prolonged trend health, but above these levels we will stay the course.

UNH

Nothing new to say here. Above the $75 swing low, we are staying with UNH.


Investing your own money doesn't have to be stressful, emotional, or difficult. By simply applying some basic supply and demand principles along with buying stocks that are going up, you can do better than 95% of investors out there. There is nothing magical about trading the markets. There are no perfect systems or crystal balls telling the future. All you need is a simple understanding of how markets move and assess your "lines in the sand" for risk management purposes.

Once you have your stops in place you are either in the stock above the line or out of it below the line. Nothing earth shattering here, just simple risk management. There is no reason to agonise over whether to buy or to sell, just stick to your stops. Buy breakouts to new highs and sell breakdowns to new lows. No need to get more complicated than that, buy stocks going up and sell stocks going down. News events should not alter your levels, nor should any outside opinion. Your levels are YOUR levels and they are determined while the markets are closed and away from the heat of battle.  

Chart of the Week

Russell 2000 weekly chart

I realize I just said above that nothing was really important with the Russell 2000 between the key highs and lows. But just to show what is happening within the range I have zoomed in on the action. There are a couple things that suggest an increased probability for higher prices from here:

1. The R2K has moved back above the 20 WMA and this week we saw the slope of the 20 WMA begin to turn up. That, along with a new 50 day high in prices is a Buy signal based on my trend system.

2. The RS trend vs the SP500 recently failed long-term support yet was unable to sustain further downside follow through. The RS then managed to regain its territory above the support creating a false breakdown and can be a major catalyst for a rally.

While these events don't guarantee higher prices ahead, they are prerequisites that all significant rallies are built upon. Because we can't see the future we need to look for signals that increase our probabilities for success. The fact that the Russell is showing this pattern here has to be taken as a positive going forward.

As long as 1,100 holds as support there is not much to fear in this space or the market in general.