We often receive questions regarding exit points on plays. There are many entry points on the stocks that we are covering, and that often makes it difficult to discuss stop losses and targets. But there are some simple rules of thumb that we follow, especially in times of turmoil such as the market is showing us. (March 10, 2001)
First, there is always the 7% or 8% stop loss rule on any position you take with stock. That keeps a positions that turns against you from getting out of hand. In this market we can take that even a step further as we have seen some good looking breakouts turn over and cascade down. On a breakout you have the pivot point that markets where we enter the play. On a good breakout, a stock can test, but it should not pierce, the pivot point. On some breakouts we are moving the stop loss up from 7% where we entered to a half point below the pivot point. While in a better market we can give a stock a little more leeway, in this market we do not want to do that. No point in losing 7% on several breakouts that turn around and fail on us.
Another rule of thumb in this market is to take profits on any breakout that runs 15% to 20% and then runs into trouble. While in a bull market that can mean we have a real winner on our hands that could explode for much larger gains, today it can mean the run is over. What we will do after such a move is watch for a pullback to the 10 or 18 day MVA, and if it occurs on low volume and the stock bounces back up, we will let it ride. If it does not hold, we are out. Of course, we are often very happy with a 15% to 20% move in a short period in this market, so we may just bail at the first sign of trouble, lock in the gain, and then see if we get another entry point.
With many of the shorter term bullish patterns such as ascending wedges, pennants and moving average and trendline bounces, we have to realize that in this market these shorter term patterns may not deliver a sustained move. The 'roots' are not as deep on these bases, and while we often get an explosive move up, it tends to last a few days before running out of steam. Again, especially with options, if we have a gain in hand, we will often take it and then look for another entry point.
Finally, if the move is not to a new high or a break below all visible support, we will set a target at the next resistance level (upside plays) or the next support level (downside plays). That way we are ready to lock in profits and get out at a sign of a reversal, but we are also willing to let it run if it blows right on through. Remember, we often get a test of a breach of resistance or support (the 'kiss good-bye'), and that can act as our decision point: if the play continues on after the test, we let it ride. If it starts to falter and does not cleanly bounce away, we exit.
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