A Simple Exercise: What Would You Do, if Anything?

Based on the Stock Charts for MO, MPEL, STX, shown below

The charts below show three stocks in which I hold a long position and the chart patterns, as I read them, tempt me to make a trade at this point if nothing changes after the first hour of trading when the market opens on Tuesday after the Memorial Day holiday. [ Editor's Note: As I write this, it is now Friday afternoon before the long weekend as I ponder on the position and the possibilities of a trade.]

What would you do? Do you recognize the possibilities?

Perhaps, from what you have learned, or can be learned from previous posts on this stock market basics site about reading stock charts, the possibilities for a trade can be recognized. The basic patterns in the charts below being related to trends, support and resistance, and the moving averages as potential signal indicators.

Based on what the charts show, you could decide to

• do nothing and continue to hold them
• sell one or two or all of them and perhaps reinvest the proceeds and buy another stock or stocks
• sell one or two and reinvest the proceeds in the remaining stock or stocks

What do the charts show?
The charts show that both MO and MPEL are moving gradually upward with MPEL looking to break through overhead resistance, shown on the chart with a green line, while STX is seemingly continuing in a not too severe downwards trend.

Should we follow the guidelines?
The question is, what should we do, should we hold all three? Or should we sell one or all of the stocks? Our general guideline rule is not to sell the winners unless they are taking too long to make additional worthwhile gains. Another general rule is to add to a winning position as its stock price moves up, and in doing so, we are following the recommendations of one of our favorite stock market advisors, William J O’Neil of the Investors Business Daily (IBD) whose inexpensive books on how to make money in stocks I frequently urge readers to study diligently.

Back to the question and a possible solution
I am contemplating whether it might be wise to sell the STX position and use the proceeds of the sale to increase my position in MPEL. That would mean I would take a small loss in STX and lose out on any of the possible gains that I had calculated should occur when I first opened the position. However, I am writing this on Friday before the long weekend and although I still have time and would like to make the trade, there is another general guideline that comes into play, namely that we prefer not to open a position before a weekend on a Friday and especially before a long weekend.

The reason for that is that we cannot foresee what events, geopolitical or otherwise, might occur during the weekend that might have a negative effect on the market. There have been many times we have seen such a thing happen and the market has opened on Tuesday with a big plunge down. There is nothing expected of that nature right now but the rules are meant to safeguard us as much as possible against the unexpected and if we need it to pay a little more for MPEL because of waiting the extra day or so, that would be OK, we are looking for a gain of at least 20% anyway so there is room for the extra costs if that should be the case.

Note: Click on the charts to enlarge slightly for a sharper view

Note: The above charts have the dma (daily moving average)lines added. The 5 dma is in blue, and 10 dma is in red. They are useful to help decide whether to enter or exit a position when the pattern of trading in the stock changes sufficiently to cause a cross-over of their lines, especially if accompanied by an increase in trading volume for that day.

The decision

1. If nothing changes significantly, the decision is to sell STX and add to the MPEL position with the proceeds.
2. Wait to see how MO performs but be ready to sell the position if it falters and use the proceeds to add more MPEL or some other stock that shows promise.

MO is a good stock to hold long-term because it pays a very good dividend, but this stock market basics site is based on a short-term trading approach with the general expectation of not holding a position much longer than 3 or 4 months, less if it is losing.

The value to the reader of this post in describung this potential trade
By outlining a decision on a trade, primarily based on the patterns shown on stock charts, the future outcome which has yet to take place, can be observed by any interested person and perhaps aid them in deciding whether the very popular non-scientific stock chart analytical approach is possibly worthwhile. I think it is — and many traders will not trade without using stock charts. But the art lies in being able to interpret them sufficiently well to make good trading decisions — and by following the established guideline-rules of course. There will be mistakes and losses, every trader experiences them, the guidelines help to minimize the losses and protect working capital for the next venture.

 

Related posts:

1. Starting Anew, A Simple Way to Use Stock Charts, Post No. 2 , November 07, 2010
2. Is this a Bottom or a Dead Cat Bounce?
3. Stock Options Explained – Part 2
4. What the S&P 500 Chart Shows as of May 27, 2011 and a Review of New Trading Candidates
5. At Last, Charts Signal Time for Buying Stocks? Maybe!
6. Yes, Indexes Signal It’s Time for Buying Stocks
7. First Trades for Our New Stock Market Basics Portfolio

Filed under: Stock Market Basics

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