Stocks Breaking Key Chart Support Levels

by Olivier on October 4, 2011

So much for averting a sell-off. Stocks are breaking key support levels across the board. Plenty of charts out there are simply broken. The market now looks like it is about to head for a heavy fall in prices. I’m not going to predict anything here. My job as a trader is to listen to the market’s message and to do what I am told. It really comes down to: “The market is my master.” So, falling down or not, today I ended up selling my last portfolio position WPRT – West Port Innovations. This is an extremely important message the market is sending.

I considered WPRT to be one of the strongest stocks around. My entry was pretty decent. The ensuing breakout occurred on monster volume. Everything was going according to plan. Then the stock retested the breakout level. New buyers emerged. Today the stock got sold again and fell back into the pattern (ascending triangle). ‘Falling back into a pattern’ is by definition technical weakness. It doesn’t matter if the stock has some issues or if it is simply being dragged down by overall market weakness. The truth is: The stock is displaying too much weakness. The breakout has to be considered a failure. Once I identify this kind of pattern, I exit. No questions asked. Two market adages that come to mind which describe this kind of situation:

  • Sell first, ask questions later. 
  • When the ship starts to sink, jump don’t pray. 

Again, I don’t care about the news. It’s all in the charts. Price is king. Always. Technically speaking I let the market or price take me in. Then I let the market or price take me out. Simple as that.

Almost everything is either technically breaking down or about to break down. Be extremely cautious. Use tight stops. Drastically reduce long exposure. This is the best advice I can give. Personally, there is no way I am going to step in front of a freight train.

A friendly reminder on why using stops is a must: A stop loss order is the only way to manage your risk. It’s the only way to keep your emotions in check and the only way not to fall into the trap of trading your opinions when the charts tell you otherwise. You will get stopped out with a small loss which ensures you stay in the game. On the other hand catastrophic losses will take you out of the game.

A few great examples for stocks providing catastrophic losses. That is, for traders who buy and hold without using stop losses: DNN – Denison Mines and the rest of the pack in the Uranium miner realm. Destruction of epic proportion. SIFY – Sify Technologies, another one which got destroyed today. BXI.TO – Bioexx Specialty Proteins which is heading towards oblivion at the speed of light. All the rare earth stocks. Buy and holders ignoring the charts are slowly starting to realize the rare earth bull market is over. Ignoring technical analysis is bad for your financial health. Enough said.

  • In plain English: Catastrophic losses have the potential to be career ending. 

Conclusion: Either we can manage to trade back into the trading range and the chop-fest is likely to continue or we are in for another big leg down. Above all protect your confidence. You achieve this by protecting your capital. Then wait for trend confirmation. Then ride the trend. I typically focus on riding up-trends and am content to stand aside during bear markets. I will talk more about the pros and cons of shorting in one of my next posts. In the meantime focus on those key concepts: Patience, discipline, humility, confidence.

A successful trader must identify his fantasies, and get rid of them. – Alexander Elder

My public list with all my charts can be viewed here:

Buenas noches!

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