Danger And Stop Loss Protection
Jack Davis | Mar 10, 2017 10:29
Originally published by Chamber of Merchants
Hello.
I would like you to be as successful as possible into the future.
I would like you to think unemotionally and make the best decisions possible so that you can trade and invest in time to come with a healthy account balance. I can never advise you what to do. But I can share what my thoughts are and hope that the additional insight provides another perspective that is worth considering when you make your informed decisions.
I am sharing this post as a post of care so that you do not get caught in the riptide, in case it all goes upside down/awry/pear shaped/ugly.
First of all…. my trade today.
h2 Portfolio Update/h2I was travelling today. To my detriment, I was not involved in trading today as much as I usually am. What I do know is that after I entered Evolution Mining Ltd (AX:EVN) yesterday at $1.92, it rallied to $1.97 today. However, when I finally had a moment to check, it had already lost its support at $1.95 and sagged down to $1.93. I knew that it would be forming a bearish candle of weakness as there was not enough buying power to sustain the rally. I chose to reduce my exposure in EVN on the expectation that the signal of weakness could cause a gap down. With 50k shares I decided that I was witnessing a dead cat bounce. Additionally, gold in US dollars was nearing $1202. I decided to reduce my risk as the downside damage outweighed the reward of this trade. I now have 25,000 EVN shares and if gold has not plummeted below $1200 USD I may sell at the high of the day tomorrow. Alternatively, my stop loss will kick me out.
With Blackham Resources Ltd (AX:BLK) my stop losses kicked in and I am out. BLK has now closed below support of 50c. I am perfectly fine to be out since the share did not do what I expected. Therefore I am happy to have been sold out at a minimal loss until I can clearly identify a reversal. Precious metals are in a risky zone and I am not arrogant enough to imagine that I have magically picked the exact bottom of the gold mining sector. It was a trade and the price action today was not satisfactory for me. Hence, I was protected by stop losses and respect my strategy enough to stick to the sidelines, for now.
Now let’s talk about the big, yellow, shiny, elephant in the room….
h2 Gold/h2We have a juncture in gold that could be problematic. Gold has continued closer and closer to the $1200 USD mark. Now in the Weekend Report I clearly stated that the sentiment is bearish. Additionally, it is worth considering that any bounce is an opportunity for short sellers to jump on the band wagon.
The bigger issue is that the big boys/smart money know that the grand prize for short selling is to knock out all the stops below $1200 USD which will cause a downward plunge and may result in more money chasing the short/bear trade.
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However, who can say it will bounce? Who can say it will fall? We can rather prepare for both.
h2 Scenario 1: The bounce/h2If we don’t catch the exact bottom, we may lose a few percent of gains before getting in.
Big deal. We’re aiming for 50%-80% of the move. Not 100%. That’s just not sustainable.
h2 Scenario 2: The Plunge/h2Breaking below support will result in not only your stop loss kicking in, but everyone’s. This means that if you have a drawdown or small loss right now, it may get much, much worse once we lose $1200 USD support. Bears will come out of the forest and chase you down. It will be ugly. It will be bloody. You will wish for it to stop and when it gets too unbearable you will sell at the bottom, if you did not have a stop loss.
*Wow. That is pretty dramatic*
Yes. it is. And it is a very real possibility that you have not fully understood if you have not considered what will happen to the miners if we head down, past $1200 USD and fail to recover.
I am not trying to scare you. But there are either two things that are going to happen:
Gold is going to go up now or it is going to go up later (Week?Month?Year?).
If gold is going to rally later…. it means that it is likely going to be sold off in the short term.
“But Merchant, aren’t we protected by the exchange rate? Australian dollar gold may stay above $1600 AUD.
Yes. It may, but, if every news article out of the US is lamenting and shaming gold’s fall, do you imagine Australian money to flock towards gold? Sentiment is the driver behind markets. Never forget that.
Additionally! Always remember that there are short sellers on the other side that will be making a killing if gold falls through support. And when word gets out, more short sellers will jump on the bandwagon.
“STOP! Tell me no more!” -Ebenezer Scrooge
Listen, it’s not definite that this is going to happen. We still have the debt ceiling. We still have the Dutch elections.
But are those events bigger than Hillary losing the elections? Are those events bigger than Brexit?
Be reasonable. There is a possibility that precious metal investors are being set up for a leg down.
Speculative short bets/ positioning on gold and silver are at an all time high according to Mike “Malonely”:
(Bear in mind that this is a man that professes that he always gets the short term wrong, so this is not a definite.)
Additionally, we know that interest rates are very likely to go up (like 99.9%), which means that the bulk of traders will think that it is bearish for gold.
I’ve said it before and will say it again, gold is the winner here. Inflation+stock marker overvaluation+bond market collapse+trumphoria failure (not his failure but rather that he inherited an unsalvageable bubble economy). All these things will rocket gold.
But what you need to consider is, are you going to ride naked, without stop losses? Or are you going to manage your risk?
(Managing risk also means managing the size of your trades.)
I don’t want you to lose a single cent of profit. But I also don’t want you to lose thousands of dollars if gold is about to head down for a fall.
h2 So here are some flags that I am considering that would tell me to get out and wait on the sidelines:/h2- VanEck Vectors Gold Miners (NYSE:GDX) in USA continues to fall.
- Market Vectors Gold Miners (AX:GDX) in Australia continues to fall.
- Gold in USD falls below $1200 USD and does not recover.
- Gold in AUD falls below $1600. Ouch.
- My particular asset/equity/share/stock falls below support and doesn’t seem to recover.
- The USD/JPY heads past 115.
- The RSI on your stock/gold/silver does not recover from oversold.
- The MACD stays negative.
- Gold closes above $1620 AUD.
- Gold closes back above $1215 USD.
- The USD/JPY falls below 114.
- The bond market falls through support (yields shoot up) *Market Panic
- The stock market (Dow/Nasdaq/DOW) stays negative while gold stays stable or goes up.
- The short selling ETF’s such as DUST(NYSE:DUST)/JDST(NYSE:JDST) correct as if profit taking is occurring.
- Individual stocks consolidate and do not make lower lows.
Unfortunately I cannot possibly list everything.
But in 1 week I would rather have you email me and say, “I’m glad I was prepared either way”.
Instead of “I thought it would bounce any moment and now I lost it all”.
“Rome wasn’t built in a day. But it sure didn’t take long to burn down”. – the Merchant
Don’t get caught up in the emotion. Cash is good. Cash gives options. Make sure you protect yourself and your capital.
h2 Losses./h2I cannot tell you how many times I have been confronted with someone saying this:
“I’ve lost so much, I can’t possibly sell it now”.
WTF?!
Listen to me now you, person. Listen.
There is someone that entered way before you, at a much lower price that could happily sell now.
There is someone that bought much higher than you, that will hold for much longer and lose much more.
The market does not care where you bought. It will do as it pleases. You need to navigate between the waves. You can’t control the waves.
So never say “can’t”.
$5000 is more than $4800 which is more than $4200, which is more than $3800, which is more than $2500, which is more than $500 which is more than $100. which is more than $0. Take your pick.
A small and early loss is a gift. A large and late loss is negligence.
And don’t blame me for any of this. I am discussing possibilities only because I care for your future.
Anything could happen.
My question is, have you considered the different outcomes? Or are you committed to one outcome only?
If you can only see one way (it’s usually “up”) then you will not know what to do when it turns against you. You will simply close your eyes and hope for the best.
Remember that gold could bounce off $1200 USD. And it would be beautiful too.
Be prepared either way.
Pretty, Pretty, Please.
Think Better. Trade Better.
|the Merchant
P.S Crude oil is looking a bit unhealthy. Watch out for the short sell on BPT.
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