SPY Follow Up 02/01/2011

This is a brief follow up to my last article on SPY, Current Trendlines and Egypt with some added notes based on today's price movement.

If you haven't already read my most recent article on SPY that I mentioned above, I pointed out current trendlines that were breached and a divergence.

As with any stock or position you may enter, preparing for being wrong, or worst case scenarios, is part of making sure you're around to try and take advantage of future opportunities.

As quickly as prices dropped below the current upward sloping trendline, price moved back above the same trendline today, AND, they made a new trend high.

There are many ways to utilize stop loss protection in a stock trading strategy. One method that could have been used for anyone taking a short position on the recent break down thru the trendline mentioned would have been to place a stop loss a little above the previous highs. Today's move up to new trend highs may have triggered the stop loss depending on how much room you allowed above the previous highs.

SPY Trendline 02/01/2011

Another method to utilize a stop loss in the same example would be to stay in the short position until the divergence no longer exists, which it still does. Even though prices made a new trend high today, another divergence still exists between price and the RSI and the MACD on the chart below:

SPY Divergence 02/01/2011

There are other ways besides these to implement a stop loss, but using one should always be included with any open positions. Trying to go short after the market seems to have been defying all odds for almost 2 years now will always be risky. The key is to minimize that risk to avoid large losses.

Just like the initial break of the upward trendline may not have signalled an actual top, doesn't mean that today's quick reversal signals the decline is over. Many times price action like this happens and "shakes weak hands out of their positions" with close stop losses, only to reverse once again in the next day or two.

Looking at the chart once more above, I'd like to add that this makes 2 times that prices have actually broken down thru the current upward trendline. The first time near December 20, 2010 was a slight decline, the most recent decline last week was a bigger breach than the first time. The next breach of the trendline will be the third time. If the pattern continues, the next time will be a larger decline than the previous one. Many times with each decline, more and more position holders give up and begin to sell near market tops.

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