Subjective Reasoning

With the market having sold off sharply last Wednesday, several sell stops were triggered causing reader feedback.

Here’s one comment, which came in Thursday morning as a rebound was underway:

EWZ has a big rebound from yesterday’s sell signal to this morning’s 6+% rise. I’m going to hold on to that one. Do you ever change your mind (from strict sell stop discipline) on any like that?

Absolutely! This is one more reason why I don’t ever enter sell stops ahead of time. You have to use some common sense or subjective reasoning, as I like to call it, before putting in your sell orders.

I touched on this before, but here’s my process again. After the close of the market on Wednesday, several sell stop points had been reached requiring action the next day. I prepared my sell orders and watched the market opening on Thursday. A rebound was in the making, and the major indexes already had moved up some 0.75% so I held off placing any orders.

As the morning progressed, and the main news of a positive GDP supported accelerating upward momentum, I decided that the odds of a higher close were pretty good.

As a result, none of my planned sell stops were entered. Only time will tell, whether this was a wise decision or not and if indeed this holding back prevented a whip-saw signal.

On the other hand, Thursday’s rebound could have been a one-day event, with the markets subsequently trending lower stopping me out a day or two later anyway. So be it. You have to realize that the use sell stops is not an exact science and probably imperfect in many ways.

Still, you need to use them as best as you can, because there is no other way I know of to successfully circumvent severe directional market downturns.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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