Stick with the Plan

Quite a roller-coaster ride this week. Whew! It was another volatile week for the major indexes and at one point it appeared that we were on the cusp of a significant trend reversal. Wednesday was a challenging day for investors as our collective mettle was tested throughout the session. At one point I had gotten emotional to the extent that I had to put pen to paper and discuss my "feelings". Essentially what it had amounted to was that I (and my Portfolio) was reaching the maximum pain threshold. The market has a way of convincing your emotional side (the fear and greed side) that you can make it all go away, all you have to do is click that little "sell" button. Click that button and the pain goes away.  

But the market is designed to extract your money and pass it to someone else. Its a perfect manipulator of your worst decision making tendencies. And on Wednesday it had almost gotten me to join the rest of the lemmings into the abyss. What it took for me to get myself squared back away was to simply get my emotions out onto paper and reassess the "plan" that is in place for just such an occasion.

Most people don't have any sort of plan to circle the wagons in times of high emotional stress. It is exactly why we get these max pain, capitulation moments when everything looks its worst. The herd acts with no plan, they are emotional and rely highly on their "gut" reactions. Unfortunately gut reactions are typically created from common emotional responses to stress. Your emotional bias will trigger these "feelings" and you will then act on them, convincing yourself that it is in your best interest to do so.

 I have remarked in my journal before how it is astonishing to me that my trading strategy (which I developed) can be right with so much more accuracy than I can act on my own thoughts and instincts. If I created something it should reflect more or less my collective knowledge of market movements and how to respond to those movements. Yet time and again, without fail my trading plan continues to dramatically outperform my decisions made in the heat of the moment.

The key takeaway it that trading and investing without a plan WILL (not can, WILL) be detrimental to your long-term returns. Keeping yourself from getting emotional in the market is the primary key to whether you make money or not. You need to have a strong foundation to fall back on to keep you from trading like the majority who lose money regularly with their ill timed decisions.

All that being said, the market once again make a stick-save right at key uptrend support on Thursday and followed through very strongly on Friday. As we enter the weekend we only lost one position for the portfolio, but we will be adding one as well . We lost Enbridge due to continued weakness and a failure to bounce back with the market Friday. We also received a new entry signal for Coca Cola (KO) on its breakout to new 16-year highs.

Going forward we need to continue to stick to our trade strategy and continue to take the signals generated by that plan. Just because the market staged a recovery doesn't mean everything is dandy again; the market doesn't ring a bell to indicate all is clear. But the important takeaway is that we are still in an uptrend and need to observe our stop levels as well as keeping an eye out for any new opportunities that come our way.

SP500 (weekly view)

Lets take a look at our portfolio after this week's action to see exactly what we are dealing with going forward.

-Exiting Enbridge (ENB)

Enbridge had been looking quite strong up until the last two weeks and then all of a sudden lost it's bid. There was a nasty bullish reversal on Thursday of this week, however the bounce saw zero follow through Friday which was also a very strong day for the overall market. Price has closed below the prior swing lows and due to a total lack of Relative Strength we are taking our exit. Our stop was set just above $47. Until this finds support and can stabilize itself we want to remain on the sidelines.

+Entering Coca-Cola (KO)

If you have read this blog for any amount of time this setup and trigger come as no surprise. Price has consolidated for the better part of 18-months and this week made the highest weekly close in 16 years. This move is confirmed by all indicators I use and even saw exceptional trading volume on the breakout this week. To gain further perspective of the long-term implications of this position take a look at the monthly chart going back to the 90's:

What I see long term is after the bull market of the 1990's, price made a large consolidation base. This is the Cup/Handle or Rounded Bottom formation and is commonly a trend continuation pattern. Based on this formation it looks like initial targets should be in the low $60's.

The real beauty of this setup is that depending on your investment timeframe you can choose to place your stop in one of two places. If you want to be more aggressive you can use a tighter stop just below the rising 20 WMA at about $41.20. However if you wish to give this more room and make it more of a buy and hold position you can use the handle swing lows at about $37.

With two ways to play this, KO makes a very versatile opportunity. I want to own this aggressively above the $42 area ideally and will be using the tighter stop at $41.20 for sizing my own positions. Back below $42 this gets more messy and I don't want to own this stock if it fails its breakout here and resumes in its trading range.

 TLT

Despite the continued demands that interest rates should be rising, they continue to trend lower. TLT looks to be resuming its effort to retest the prior highs from early 2013. Until something happens to invalidate this 10 month uptrend we want to stay the course. Stops should be below the recent swing lows at $113.

TWX

Looking like a sure stop out early in the week, TWX was able to rally back hard Thursday and Friday. There is not much more to say here other than we want to remain long above the most recent swing low near $73.

ECL

ECL was a bit of a mover this week, fortunately the only damage done was a retest of the prior breakout level. Once that line was tested, buyers swooped in and drove prices right back near all time highs. If price can make a new high we can move up stops to this week's low near $111. But for now we still need room down to $108.50 for a confirmed trend break.

This week's action is textbook breakout stuff.

NKE

Nike bucked the volatility this week and moved to new all time highs. This is leadership action. When the market is finding support, this stock is rocketing to new highs. There is nothing more to do except ride the wave. Stops are still at last week's low.

GOOG

GOOG flirted with its stop area this week, but managed to close well out of danger. We are still waiting for this one to get rolling. Stops are at $566.

IP

I thought IP was finally going to roll over this week but once again it clings to life. This stock has been on the verge of explosion for months. Considering that we keep seeing higher lows held and the upper resistance repeatedly tested, I believe this still resumes higher. Stops remain below the swing low at $47.10.

WFC

Wells looks like it could be carving out a small rounded base. We will need to see price break above the prior highs near $54 for this to resume higher. The trend is clear here and as long as the stock continues to make higher lows above $50 there are no problems.

UNH

Another very clean uptrend. Until a lower low below $80 and trend support occurs we want to stick with UNH.

BRKB

While the SP500 challenged it lower trend support and violated the 20 WMA, BRKB didn't even touch it's rising 10 WMA. The outperformance is excellent here and above the consolidation zone at $130-125 this continues to look like a big winner.

BMY

BMY continues to hang out above its rising moving averages and as long as it stays above support at $49, I like the risk/reward very much

HAIN

Similar to Nike, HAIN is just pegged against its all time highs and has the look of a leadership stock. Soon we will be able to move stops up to the low $90's, but for now they still need to be below our entry bar.

GS (daily)

I wanted to show the Daily chart for GS here because this is perfect breakout retest action. This is what I like to see in leading stocks. When the market is testing lower trend support, I like to see stocks that are retesting their prior breakout areas. Once the selling subsided this week, GS ripped to higher highs signalling a successful retest of the breakout area.

Stops can now be moved up to the $177 area.

GILD

GILD continues to consolidate and build a new base support. The 10 WMA is acting as an excellent trailing support and we can move our stops to the recent swing lows once price makes a new high. Currently stops can be placed just below the 20 WMA at $93.