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Mar 03

Examining Our Exits

A follower on StockTwits was kind enough to point out how $OCN had rallied sharply after I’d cut my long position. I said it was OK, I’d obeyed my stop.

In the past I’ve tried to avoid keeping the charts of recently closed positions on my screen, I’ve always found it easier to move on to the next one and not dwell on anything, but the fact is, I know that as long as I’ve followed my rules then I should be able to look at them in the cold light of day without regret. If not, then it identifies an area for self-work. So let’s do it, and for added effect, here in public.

For the record, whenever we talk about a stock position on this blog, for performance purposes we always take the following day’s open as our entry or exit. There are no shenanigans here. This is called transparency. Ask your Wall Street broker what the average drawdown on their research recommendations is and see the look you get.

Since starting this blog we have closed 4 stock positions which I’ll look at below. We also have 22 open ones, the progress of which you can see here in my weekly review.

 

Whole Foods ($WFM) -11.4%

The thing about these kind of names that have enjoyed spectacular growth and been well-followed momentum stocks in the market is, when it’s over, it’s over, and they can react all at once. In the circumstances this wasn’t a disaster, it dropped immediately to the support area we’d cited, and a few days later once that was gone we were out. Without rules, what would you have done? I guess you know there’s another support nearby but are you really going to wait to find out if it gets there and then holds? If you do, then suddenly you’re looking for reasons to stay in, rather than remembering the reasons you got in, which would make you conclude they’re already invalidated.

AlphaCapture

 

iPath DJ UBS Copper ETF ($JJC) -5.3%

This had broken out from a huge consolidation triangle and was in a choppy intermediate uptrend, but after failing to build any further, sank back within the pattern, which in turn triggered an exit. For what appeared to be a swift move, losing 5% was not a big deal, this was part of the attraction of the risk-reward, had it have extended its uptrend the upside would have been considerably more. It’s since slipped lower again and depending where you draw your lines, is in the process of breaking that major support. To be honest, if I was in the business of shorting stocks this is now one I would be looking at if it confirms a break down from that pattern.

AlphaCapture

 

BanColombia ($CIB) -3.4%

Again, for what looks like a decent break of support on volume, losing 3.4% was a low-risk trade for potentially huge upside on a break of that major long-term resistance. This is now getting close to its 200dma (not shown), which may produce a bounce of some sort, but we won’t be in again until the uptrend re-establishes itself.

AlphaCapture

 

Ocwen Financial ($OCN) -9.1%

So here’s the one where we’re supposed to feel awful. Yep, had we not have obeyed our stop or instead found another reason to stay in, we’d now be level. But let me tell you something, in the long run, were we to do that across many other positions, we’d be much worse off. It’s a very slippery slope.

AlphaCapture

$OCN went down 7 days straight, 4 of them distribution days, and broke MA and price support, triggering our exit. So again, what are you going to do? Move your stop to the next band at $32-$34 and wait to see if it holds?

It’s OK that we lost, our entry rationale got invalidated, we got out. What happens to price afterwards doesn’t matter. The only way it would is if it told us to get back in. In actual fact, looking at the weekly chart (not shown) and the recovery it’s staged since our exit, it may just trigger another entry for us, having only been out for a week. And that’s OK too. As long as everything we do fits into the systematic process we create, every trade is a good one.

 

6 comments

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  1. Keven

    In your $JJC analysis, you wrote, “To be honest, if I was in the business of shorting stocks this is now one I would be looking at if it confirms a break down from that pattern.”
    I am interested in knowing why you don’t short stocks.

    Thx again!

    1. Jon Boorman

      I can short stocks but I’ve never found a way to consistently make money doing it. One or two here and there would be fine but I couldn’t run a portfolio of short positions. It’s possible with ETF’s but stocks present other issues. When you’re used to looking at technicals it’s very easy to look at a chart in a clear downtrend and think it would be no different to riding an uptrend. They move very differently however, the rips higher on short-covering can be devastating, companies in that much trouble can be refinanced, seek strategic alternatives, or be straight bought out at a moments notice. Done properly shorting stocks often involves intricate knowledge and understanding of the specific company and its business, something I don’t have. I think that’s why someone like Chanos is able to do it so well. There are also greater costs in doing it and it’s not a strategy you can effectively backtest without knowing what the borrow restrictions or costs were historically.

  2. Keven

    Of $OCN, you wrote, “$OCN went down 7 days straight, 4 of them distribution days…”
    Accumulation…Distribution…Consolidation… I’m assuming you have very specific price/volume conditions for the definitions of each of these; could you clarify?

    1. Jon Boorman

      No, they’re fairly generic terms, accumulation is rising on increased volume, distribution is falling on increased volume. A move is seen as being more significant if it occurred on more volume than the previous day.

  3. Keven

    So futures, currencies, commodities, ETF’s…would you/do you short these? If so, is the analysis basically the same for the short side on these?

    1. Jon Boorman

      Yes I do. ETF’s may still be subject to some of the anomalies I mentioned, even though they’re not companies, they’re still stocks. When managing assets there’s a good chance I have two products, long-short futures, long-only stocks. I haven’t decided how or when ETF’s might fit into that.

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