Risk Levels to Watch and New Trailing Stops

Contrary to what "Harry Hindsight" traders tell you, nothing is ever certain or clear with regard to the future direction of the markets. Risk of the unknown is ever present and there is ALWAYS a reason to be cautious when exposed to open market risk. But as Jon Boorman (@jboorman) has said many times, "it's called risk, we manage it". 

We can never know what tomorrow will bring, fortunately we don't need to know to be successful with our investments. All we need to know is the amount we are willing to risk on an idea and exactly where we are wrong in the event the market moves against our position. 

Now, we don't own the market, but we do own leading stocks in uptrends within the market. This means we don't take direct action on any of our trades from what the market alone says, but knowing where the risk for larger downside lies can be helpful for our individual holdings. 

This week I want to take a look at the SP500 on 3 separate timeframes and show where my risk levels are set and why. 

SP500 Daily

Looking at the Daily chart of the SP500 a lower low would be set if the market closes below the 2,079 level. Remember that an uptrend is defined by higher highs and higher lows. Once that sequence is broken the trend no longer favors high probability upside momentum. It certainly doesn't mean the market can't go higher, but it would be a cautionary flag saying the short-term price action is beginning to weaken.

A solid close below this level would cause me to rethink shorter-term bullish bets within my Portfolios. Currently the market sits above these levels, therefore any movement above that low is simply constructive consolidation within the larger uptrend.

SP500 Weekly

Stepping back a bit to the Weekly chart, my next level of risk is the 2,040 March lows. A clean close below this low would signify longer-term risk exists for the current market. This is also where the 50 WMA sits which has been a solid trailing support for the entire run beginning in 2012. October's pullback gave a good hard jolt through this moving average, yet the market found its footing and resumed higher.

I will also be watching the closing low at 2,053. On a closing basis this should be a big level of support as it was stiff resistance for the whole month of January. It held as support once before, in March, and I would want to see buyers come in at those levels to defend the uptrend.


SP500 Monthly

Zooming out further the Monthly view shows the consistency of the recent bull trend. All dips have been repeatedly bought quickly, so it would really raise an eyebrow if the swing low from January cannot hold.

My major Bull/Bear indicator looks at this Monthly view of the market. For a Bull cycle to end (or be seriously challenged) I look for the "uptrend invalidation", 20 MMA violation on a closing basis, and a MACD bearish crossover. That combination typically leads to very challenging trading environments. But until we see those 3 criteria met I will still believe the market is in a Bullish cycle higher.

Currently this indicator is showing 2 of 3 Bullish cycle confirmations:

The only signal that is not aligned with the bullish confirmation is the monthly MACD. This is also the most benign of the 3 signals; I think of it as the early warning system. What its telling me is that the market is in a long-term uptend, but recent momentum is slowing (and could continue that way). It is not inconceivable that this market continues to churn mostly sideways for a while yet. In fact a MACD reading like this usually suggests a consolidation through price or time.

The key to this whole equation however is price confirmation. So far price and trend continue to point higher. Until these other signals begin to turn lower we will continue to defer to the long-term trends and resilient price action in place.

Trailing Stops

We continue to see strength within our individual holdings and can trail a few stops higher this week. 

SBUX

Starbucks continues to lead this market. It's been a relentless rally for all of 2015 and I expect any "healthy" pullback should now hold above the 48.50 swing low. 

AIG

AIG has been a factor in leading the Financial space higher this year. Since February the stock is up 25% and is just now really moving away from its post recovery base. New stops can be placed at the breakout level and just below our entry point. 

GS

GS looks very similar to AIG and is in the early innings of a post recovery breakout. I love the recent relative strength and breakout follow through. 

TWX

TWX is still wedging tightly near multi-year highs. I feel a move away from this tight trading will setup the next major leg for the stock. While it could go in either direction, I only want to be an owner if it breaks to the upside. Trailing stops should be placed just below the support lows.

WFC

 Again, these leading Financials all look about the same. One thing to keep in mind with WFC vs the others is that WFC made new all-time highs this week. The breakout follow-through has been consistent enough that I feel raising stops to 54.05 is appropriate. 

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