From a look at the S&P 500 stock index chart, shown below, it can be seen that there are a series of several trading lows starting on August 8, 2011. Unless proven wrong by subsequent trading action, I am accepting that as being the bottom of the recent stock market correction and if correct, we should now see the start of a new leg upward.

Note: Click on the chart below to enlarge for a sharper view.

Chart of S&P 500 31 August close

Chart of S&P 500 31 August close

The S&P Chart shows that the market has closed above the 20-day moving average line, shown in green on the chart, and the stock price has also closed above the recent high just above 1200 — and those are the patterns that we accept as the confirmation signals. Therefore, based on that assumption and following up on yesterday’s post to this Stock Market Basics website, in which it was mentioned that: “ . . . unless the market falls quickly back to the previous lows, around 1120, I will take paper trading long positions in all those stocks above their 20- dma’s”, we are now in the process of buying stocks for our new paper trading portfolio to which we have given the name “Stock Market Basics Guide – August 2011″.

The new portfolio includes the stocks mentioned in the recent posts on this site and I have used today’s closing prices as our starting point. The stocks and prices have been entered on the Finance.Yahoo.com website under the Portfolio tab which is only accessible via an I.D. and a password — however, to show what is happening from time to time, win or lose, I will display periodic updates on this Stock Market Basics website. Yahoo updates the chart constantly as trades occur throughout the trading day.

The opening positions are shown in the chart below.

A note of caution

It is important that anyone reading the material on this website realizes that the references here are not real trades that are backed by cash but are merely simulated paper trades that are tracked in real time. We use this method  called paper-trading in order to help discuss the stock market basics that might be of interest to newcomers to trading who wish to observe how the market works and hopefully learn what happens when events impact the market in general and some stocks in particular. It is well known that events not directly connected to the individual stocks have a disturbing affect on the stock market. Events such as the unrest in the Middle East, or natural disasters — Japan’s Tsunami comes to mind —  and the uncertainties of the financial stability in the Euro-zone, and even those of the U.S. affect the market and can upset forecasts and expectations.

I would also like to mention that the interpretations of the stock charts that I discuss on the Stock Market Basics website are totally my own and may not turn out to be at all reliable as events unfold — and that is the reason why the stock references are for simulated trading on paper only — it is too easy to lose money, especially as a beginner, when trading stocks without a deeper understanding of the process. We need to learn by observing what typically happens as trade positions evolve in the day-to-day market place.

And dissenting views of the day — important to know, a further note of caution

On today’s CNBC television show Fast Money, almost all the trading expert participants expressed the view that the market will go lower, will retrace to below the August 8 bottom (the opposite of what I’ve been saying above) and will probably do so starting next week. September is traditionally the worst trading month of the year, meaning losses can pile up, and that may last through October as well. Some believe that the current rally can be significantly attributed to short covering and they would rather be selling into it than buying. To really provide an upward impetus, we need to see stronger economic data from here on out to the end of the year and beyond. A point well taken.

Another reason to trade only on paper!

The new paper-trading portfolio
Shown below is the new Stock Market Basics Portfolio – August 2011, with 10 stocks purchased on paper at the August 31 closing prices. As indicated in the Gain/Loss column, everything is at zero right now — but tomorrow there should be changes, after 4 days of the higher highs that we can see on the S&P chart above, I would not be surprised to see a small correction about now, that would be quite normal — but a drastic fall-back would be important. As this portfolio chart is updated by Yahoo it will be posted here from time to time so that progress can be tracked in real-time.

It is worth noting, even before trading starts for us, that some of these stocks made gains today and others made losses — our objective is to minimize losses and maximize gains — that takes careful attention and risk management.

Exit Strategy
We must have a general plan for when to close out our positions. For a gain, if any, the general targets are for a 25% to 30% and for a loss, should it occur, we’ll set that at -8% to -9%. The stock chart patterns will help us be more specific in choosing the actual exit price.

SMBG Paper Trade Portfolio - September 01, 2011

SMBG Paper Trade Portfolio - September 01, 2011

Finally, to repeat from yesterday:
The objectives of the Stock Market Basics website
The comments and suggestions on this website are targeted at newcomers to the stock trading arena who wish to learn about the stock market basics. By illustrating our stock picks with charts, and paper trading them in real-time, we try to give the newcomer to trading an understanding of the trading process, how to choose and qualify stock candidates and how to recognize possible entry and exit signals that might be provided by the stock price patterns that evolve and can be seen on the charts. That information, and a set of simple guidelines that are meant to minimize risk and manage trading capital are the essential stock market basics we wish to convey. Win or lose (on paper), the actions that we take and illustrate on this website should help teach us the basics.

Related posts:

  1. September 19th: Time to Review Our New Paper-Trading Portfolio and the Stock We Are Buying
  2. Paper Trading Portfolio No. 3 — An Explanation of the Stock Market Basics Approach to Short-term Trading
  3. About Stock Market Basics Paper Trading Portfolio 3
  4. Stock Market Basics Paper Trading Portfolio No. 3
  5. A New Series: Starting With Small Capital, a Paper-trading Portfolio
  6. Still Waiting on the Sidelines to Start Paper-Trading Portfolio Number 3
  7. Portfolio 3 — Getting Ready for Paper Trades

Filed under: Stock Market Basics

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