Expectations Vs. The Market

Last Friday the Russell 2000 (IWM) index and Semiconductors (SMH) cleared their 50-Day moving average.

From a technical standpoint this looked as though the rally would continue into Monday.

At least that is what traders/investors were hoping for when they bought near Fridays close.

Monday’s price action turned out quite different.

So, was it wrong for people to expect the market to open higher Monday?

Not necessarily. Although we all trade with the expectation to make money, we must strategize with the expectation of losing money.

In other words, it is necessary to have a risk plan for every trade you take and position size accordingly.

For instance, if someone had taken a trade based off IWM clearing its 50-DMA and come Monday the market gapped below, then it is easy to see what they expected was wrong.

Therefore trading off of phase changes is best when you have a second day confirmation.

Because IWM did not close a second time over the 50-DMA gives bulls two choices.

Watch for IWM to make a second attempt to clear its 50-DMA or set a stop loss at the nearest support level.

Our advice is to have a stop loss under the March 5th low at 207.21.

And if you traded the phase change tighter with a stop under Friday’s low or if IWM failed to hold the 50-DMA, you planned for that well and are now in cash on that position.

Now, with a clear head you can start again looking for a new entry.

This might sound simple, but this is helpful when actively trading.

Often, people do not completely know when they are wrong or plan for when they are wrong, which can lead to much larger losses.

By keeping clear expectations of why you entered a trade, you will have an easier time following your trade plan. Then, if the market does not follow through immediately, you already planned for that and hopefully, gave the trade enough room to sit through that.

S&P 500 (SPYSupport 386.87. 398.12 Resistance.

Russell 2000 (IWMFailed second close over 50-DMA at 220.53. Watching for another attempt over 50-DMA.

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