Looking for secondary signs of weakness

Brett Steenbarger warned about the weakening in the market back on Sunday, Feb 4, a day before $SPY dropped >6%.

The psychological takeaway is that we need to drill down and look beneath the market surface and approach each fresh set of data with an open mind. On the day we made a peak in SPY, we had 599 stocks make fresh three month highs and 199 register new monthly lows. Two weeks before that, we had almost 900 new three month highs against 135 lows (data from Barchart.com). The open mind respects price action and market strength, but also is alert to cracks beneath the surface

via Lessons in Trading and Psychology – 1: Regime Changes at TraderFeed

Dollar cost averaging with stop loss orders?

More on stop loss orders, which are called The Most Important Trading Tactic in this article from The Balance. The idea of stop-losses is great. In practice, I’m less convinced.

The optimal degree of the stop-loss price is different for every investor, and sometimes may be as low as a few percent. For others the level could be as great as 30 percent, sometimes even larger. For example, some investors may set their stop-loss price at 70 cents for shares which were bought at $1. Whatever level each person chooses represents their total downside risk.

An effective strategy to protect against downside, and preserve potential gains, is to use multiple stop-loss prices.  For example, you may commit to selling a portion of the shares at one price, then another part at an even lower level.  Using our example once more, when the shares hit $2.85, you may have established a mental stop-loss at $2.50 for one-third of the shares, then another at $2.00 for the remaining two-thirds.

The first rule to catching a bottom? Don’t try to catch a bottom

Michael Batnick, on attempting to catch a bottom, in a post from last July:

Nobody can actually buy low and sell high. Not consistently anyway. Successful traders typically buy high and sell higher, and successful investors buy low and sell rarely. But if you are tempted to catch bottoms, to be the investor who can recognize treasure where others find trash, there are some broad rules that I suggest you follow.

The first rule to catching a bottom? Don’t try to catch a bottom.

The first rule of catching a bottom is don’t try to catch a bottom. It’s one of the hardest things to do in all of investing. Macy’s has experienced three separate 30% rallies on its way to a 70% decline. None of them stuck. Quick traders made money. Bottom-fishing investors got filleted.

Here’s one way to do so:

Rule #4: Wait for a longer-term moving average to stabilize. Macy’s twelve-month moving-average, for example, is still crashing. If you wait for a long-term moving average to stabilize, you won’t buy at the bottom, but better safe than sorry. Falling knives are guilty until proven innocent.

Good reminders when instincts are telling you differently. Read his full post Ten Rules For Catching A Bottom at The Irrelevant Investor.