I should elaborate on my view on what a rally is. A rally can be a short-lived recovery or it can be the final spurt at the end of a long-term trend up
I thought it was appropriate to cover this topic for three reasons:
- As the market resumes its move up we will want to get set to take profits on more recent buys and/or
- We have bought stocks that have not performed as we expected and we need to quit them and just move on.
- It is likely that we will have stocks that will have performed well for us over a period but are now topping.
Selling, like buying is not a precise science but with a disciplined approach we are more likely to get it right more often. When I do sell I also resist the temptation to go back and have a look at how that stock continues – if I do it is generally to check how technically accurate I was in my exit. If I make a wrong decision I can live with it and will not dwell on it.
Dealing with each of the above situations in turn:
- There are stocks that I have purchased over the last month that I will be watching very closely. I am not too concerned about the retracements as I am happy about the strength of the stocks that I bought and am not concerned that the retracement will be below my buy-in price and I am equally confident about how far the stock might rise to and when I will sell. For each stock I have a target in mind.
- I mentioned in last week’s article that inevitably when you buy there will be stocks that will not have performed, as you expected. You cannot be correct 100% of the time and immediately you recognize a decision was incorrect you need to reverse the decision. ARL is an example of this. In the chart below you will notice it had a very strong rally from 21c at point A – looked like a “takeover” rally – it ran to 32c but in my view will not be able to sustain that move up with certainty. It may, but I want to minimise doubt in a volatile market.
- I have held two stocks for over 12 months and I am no longer convinced that they can give me the same return over the coming months as they have over the last year i.e., I can get a better return elsewhere – nothing wrong with the stocks per se. Two examples of this are MGR and RKN, both of which I have exited in the last couple of weeks. They may still increase further but the quantum of this possible rise is the matter of doubt.
I have shown MGR below. You will see it has had an outstanding move up since 2000.
RKN’s move has been similarly strong but the main rise has been over the last several months.
How do I know the run is slowing for these stocks?
A fundamental aspect to my trading is the use of Elliot Wave Theory. The basis to this theory is that stocks move in waves – markets move up, pull back and move up again and the theory’s contention is that the size of these moves can be a basis for prediction. It may all sound a little esoteric but after 20 years of using various forms of market analysis I have found it to be a very reliable tool. Obscure it may be, but if it helps make money that is good enough for me.
So more on this mysterious and at times controversial topic over the next couple of weeks.
In the meantime successful investing.