When should I take profits on QQQ?

On the first trading day of 2012 the exchange traded fund QQQ broke out of a two month triangle consolidation. If you bought this ETF on the breakout day, you are now sitting on a paper profit of 13%. Here is the chart with the triangle in blue and a steadily rising trend line in green:

 Chart courtesy of StockCharts.com

Six month chart of QQQ - 2/28/12

 



  This trend has been going steady now for two months. How high will it go? I have no idea. That is why I need a plan for when to take profits and when to hold on. These rises often last for 5 - 12 months, but there can be some corrections along the way. One of the best ways to hold on to your profits is to use the moving average convergence / divergence, or MACD, indicator in conjunction with the rising trend line. The MACD indicator is a momentum indicator showing if the trend is getting weaker or stronger. When the black line passes above the red line on the MACD plot, the trend is getting stronger. When the red line is on top, the trend is weakening. This is also shown as a negative reading in the histogram (blue bars). As long as the black line is on top, just keep drawing a trend line connecting the lowest daily lows to each other. When the red line is on top, as it is in the chart above, and the closing price goes below the trend line, it is time to sell. The ten day moving average, which is plotted on the chart above, can be used in place of the trend line. Just sell when the stock closes below the ten day moving average and the MACD is negative.

Here is an example from 2010:

 Chart courtesy of StockCharts.com

Six month chart of QQQ - November 2010




The triangle breakout occurred on September 13 in the chart above. The lower green trend line is drawn from low to low as long as the MACD is positive. If the MACD goes negative and the trend line is broken, as happened on October 4, that is a sell. In this case, the sell may have been inadvisable because it was just testing the support of the old high (lower black line). If you sold, a new buy was possible when prices broke above the last high (upper black line) and the MACD went positive. This happened on October 13. Finally, on November 11, the trend line was broken and the MACD was negative for a sell.
MACD is especially useful after a big pattern breakout, like the triangles above, but can get tough to use in a choppy market.
Happy trading.

Why I always use sell stops

This morning gold fell $70 an ounce in one hour. Gdx fell $2.55 at the same time and went down even further a little later.
Yesterday, both GDX and HUI, the gold bugs index, closed above their 200 day moving averages, resulting in heavy buying (and selling) at the close. My computer shows over one million shares of GDX changed hands in the last minute of trading yesterday. Everyone who bought then, and didn't set a stop, is now down 3.5%.
What caused this market mayhem? Ben Bernanke spoke to Congress.


Whatever you are trading, you should enter a stop loss order to limit your risk when you are not watching. The stop loss order will sell your stock as soon as the price gets down to a price you have determined ahead of time. This takes the emotion out of your decisions to sell and helps you sleep at night.

Even if you use a full service broker (although I'm not sure why a trader would not use a discount broker) you need to make sure they physically set a stop loss order for you rather than just watching and hoping they can get to it.

So how do you determine your stop price? Trend line support, old highs, and old lows are all valid places to put your stop. Do not put the stop right at the line. Give it a little room so a minor violation of support will not send you out at the low. How much room will be determined by experience. Look back and see how much support was violated on other occasions, but still ended up holding.

Happy trading.