Trade Prep: The Danger Zone

Are investors starting to freak out over the market’s lousy performance?

The president certainly is…

The market’s whipsaw moves have President Trump’s full attention, according to The Wall Street Journal, as he seeks reassurance from advisors that his ongoing trade dispute with China isn’t sending stock prices lower.

“Mr. Trump has often dismissed market fluctuations as part of a natural correction, but several people close to the president say he places as much importance on the health of the Dow Jones Industrial Average for validation of his job performance as he does with his polling numbers,” The Wall Street Journal reports.

Last week’s failed bounce isn’t doing the president (or investors) any favors. In fact, the market’s getting a little hairy as we approach the final trading weeks of 2018.

The bulls’ skepticism of the trade war truce was on full display last week as the major averages careened toward their correction lows. When the dust cleared, the Dow Jones Industrial Average erased its entire post-Thanksgiving rally and registered a 4.5% decline for the week.

Let’s break down the action:

Taking a closer look at the market’ choppy range, the major averages are quickly approaching the danger zone

On Friday, we highlighted the patch of real estate between 2,600 and 2,800 that has corralled the S&P 500 during the current correction.

The 2,600 level is now vulnerable to another test as the bears gain control following Friday’s 2.3% decline.

SPX

To be clear, nothing has changed from our perspective: A close near 2,600 below the Thanksgiving lows would probably trigger another leg lower, while a break above 2,800 could spark a powerful rally.

Even as the major averages remain perched near their correction lows, it’s important to remain objective. Remember, volatility is elevated right now. As we’ve witnessed over the past several weeks, the market can do anything.

Your clearest path to gains? Slow down, keep your emotions in check, and take what the market gives you.

Taking a longer-term view, it’s time to start thinking about our big trading themes for 2019.

We’re stuck in a volatile, unforgiving market environment right now. But that doesn’t mean you should ignore longer-term trading themes altogether. It’s important to round out your shorter-term trades with some bigger ideas. You just have to make sure to enter these plays with the correct mindset.

Some of your most disappointing trades are probably stocks you bought with a long-term timeframe in mind, but no plan or exit strategy to fall back on. With no real trading plan, you’ll end up with poorly-timed buys and sells that cause you to either miss out on a much larger run or give back hard-fought gains.

To help combat emotional bias and get into the right stocks, here are some thoughts we’ll try to keep in mind when planning our next long-term trade:

First up, I want big, well-known stocks in popular or upcoming industries for my longer-term ideas. My trade needs to be easy to understand. I must have a solid “elevator pitch” before it passes the test. If it would take longer than a short elevator ride to convince a fellow investor of my idea, I should scrap it.

Next, I want to seek out stocks that have the potential to become market leaders as the correction subsides. Paying close attention to the relative strength of the stocks and sectors on our radar will give us a good idea where we should concentrate our efforts.

Finally, we should forget about trying to bottom-tick our entry. Don’t get hung up on buying your longer-term trade at the exact low. It’s never going to happen. Yes, that means you might have to endure a little pain as you watch the stock bottom out and move higher. But if we fail to wait for confirmation, we could end up chasing some nasty false moves…

Remember, it’s easy to fantasize about the profits to be made once this correction ends. But if we don’t put in the work, we won’t have the chance to cash in on the new trends that could lead the market higher in 2019.

Sincerely,

Greg Guenthner

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Greg Guenthner

Greg Guenthner, CMT, is the editor of Opening Bell Fortunes and Seven Figure Signals. He has been with Agora Financial/Seven Figure Publishing since 2005. In 2019, the average position in Greg’s Sunrise Fortunes portfolio outperformed the S&P 500 by 1.65x.

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