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Monday, January 03, 2005
Market Recap
Today was proof once again that relying on the futures before the market opens to dictate direction is not reliable. We have said this over and over in the past and this was the case again today. This morning the stock futures were up big and the markets opened strong with a big advance at the open, but profit takers quickly started selling the strength and the markets trickled down for the remainder of the day, closing near the lows of the day. The Dow was down -53 points, the NASDAQ lost -23, and the S&P was down -11 points. Today's action was probably people selling their big winners from 2004 so they will not have to pay taxes on their gains until April 2006. If they had sold last week, the tax bill would be due this April. I am sure this is only a temporary pullback but caution is advised because today's selling left many charts with big red candles. That is always damaging to charts, and unless they bounce back very quickly (that is, no follow through selling tomorrow), things could get ugly in a hurry. This could be just a shakeout before the next advance but nevertheless, we must be cognizant of the situation and keep our stops tight. I suspect buying should occur soon because this is the time of year when fresh money starts funding the IRA's and 401K's. We will see how it unfolds.
Unexpected Breakouts
We had a very tough market in early to mid 2004. The markets were generally down in the early part of the year, and then we entered a very tough sideways market. It was not until the last four months that the markets began a nice rally and kicked in with a big year end, post election rally. Our mistake was in trying to trade for huge breakouts in the eight months preceding the rally. Our trading style of buying breakouts did not work well in that environment. Breakouts failed most of the time, so adjusted trading to a more conservative approach of buying the pullbacks. There were breakouts but they were in stocks whose charts were so bad that we just could not justify a trade. Their charts were so ugly prior to the breakout that they were not on anyone's radar in the first place. There is nothing we can do about these types of breakouts on unexpected news releases.
At the Mercy of the Gap Down
We had a few stocks really sting us in 2004 by trying to hang on to a trade and not sticking to a tight stop loss. It is a sinking feeling when you get caught in a gap down. When it does happen, you have very few choices. We are usually well past our stop loss rules after a stock gaps down so the choice is whether to hold on and hope for a minor bounce to sell into, or sell and take a huge hit. Either way it stinks but there is not much you can do. Remember, if you hold a stock over night, you are always at risk of a bad news release the next day.
Expensive Lessons
Every day should be a learning experience. Every year that comes to a close allows us time to reflect on the past year to see what we learned. Some of our education comes from making mistakes and some through the perfect trades. We need to pay attention to those lessons on both sides of the trade. We learn from our good trades but it is the losing trades that are the costly lessons. Your trading education is not free, most of the time you will learn by making some very expensive mistakes. If you only learn one thing, remember to stick with stop losses. Stop losses can sometimes work against you because you will stop out just before a stock takes off. This is called a shake out and it happens often. However, if you hold the stock through what you believe to be only a shake out and you are wrong, the stock will continue to drop. Most of the time when you think you should sell, you should. If you do not sell where you should have placed a stop loss order, the stock will drift lower and this can be a killer to any portfolio. A stock that drops daily while you continue to hold can wipe out the rest of your good trading gains.
Stick to Your Trading Plan
Another goal besides sticking to stop losses is to stick to your trading plan. In 2005, we will stick to our trading plan and we will keep our stops in place as we enter trades. We may still get caught in those unexpected gap downs; there is nothing we can do about it. But I am positive we will catch many more breakouts than in 2004 and that should propel our profits regardless of some small losses will endure due to our tight stops.
How the Real Money is Made
In 2005, our goal will be to learn as much as we can about the market and stock trading. Yes, our goal is also to make money by trading, but the real money will be made only after you learn how to trade successfully. Let's make that your goal and the money will start to flow into your portfolio with almost no effort
TWPD in 2005
We are always looking at ways to expand and improve our service. We have made huge strides over the simple roots we started from. The team we have now is the strongest it has ever been, and we are getting stronger. So keep the faith, stick to the trade plan, and let your friends and family know about us. 2005 will be a good year for TWPD, your portfolios, and hopefully the overall stock market as well.
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