Stocks got rocked today after fears of a U.S.-China trade deal are dwindling. That said it’s expected that we’ll see a tariff hike (an increase of 25% on $200B of Chinese goods) on Friday.
But here’s the thing…
I don’t have time to sift through every headline about every stock in the market. Nor do I have the time to study every economic report and data release sent each day.
However, despite spending little to no time studying fundamentals… I’ve been a consistent trader who has generated millions in trading profits.
Studying charts and price levels. They say, people lie but numbers don’t. That’s why I spend most of my market study time sifting through stock price charts. I use “moving averages” to help me identify the trend.
For example, I teach my clients to aim for singles and doubles. However, it can often lead to “accidental homerun trades” like in APC last month.
(I can teach to become a better trader, one that thinks about risk and capital preservation first. If you’d like to get started, click here to find out more.)
You see, it was old school technical analysis, using my rounded bottom breakout pattern that spotted the APC trade not my knowledge of M&A.
And right now, the market is in sell-off mode.
But you know what?
I am not gonna bother reading about the trade news… instead I’m going to focus on what has brought me success: analyzing charts, trends, volume and price levels.
Furthermore, if you learn some of the basics that I teach, you’ll have a better understanding of how to enter and exit your trades.
This will also help you stay disciplined. For example, if you are aware of key stock levels you may avoid bad habits like staying in a trade too long… or averaging down. Read on to learn how to use charts and indicators to make not only money but to save it too.
Now, there are a number of technical analysis indicators you can use to signal when to get out of the market. For the most part, I like to keep things simple and use moving averages. Additionally, I’ll look at the relative strength index (RSI) sometimes, as well as On Balance Volume (OBV) to give me a clear signal to get out of longs, or stay on the sidelines.
For example, there were clear signs to exit the market recently.
First, the SPDR S&P 500 ETF (SPY) was right around a resistance level.
If you look at the chart above, you’ll notice a blue horizontal line. Well, this was an area where SPY had a hard time breaking above. You see, SPY failed to close above $294 multiple times, indicating that the market could be exhausted.
Now, successful traders will spot this pattern quickly and head for the exits. However, some need a bit more confirmation to let them know to get out of their longs and stay on the sidelines.
Moving Averages are Great for Signaling Exits
Now, if you want a more simple and “clear” way to signal when to exit, you could use a simple moving average (SMA) price break.
Simple moving averages act as a price smoother and give you an idea of the overall trend. Basically, it takes the average prices of a stock or ETF over a specified number of periods. For example, the 20-day SMA will calculate the average closing price (generally) of the last 20 trading days over a rolling timeframe.
You don’t have to worry about calculating that by hand because most trading software allows us to do that.
With the moving average price break, you’re really just looking for the price to fall below a specific level – the current 20-day SMA (or any other timeframe that works for you). For example, here’s a look at SPY on the daily chart again.
Check out the chart above, you’ll notice an encircled area. You can clearly see the candle stick is below the purple line – the 20-day SMA. If you see SPY or a stock break below the purple line… well, that confirms that the uptrend may be over, and there could be a downtrend in the cards.
Now, there are other ways to use technical analysis to signal an exit.
Combining RSI with Price Action
For example, some times, I like to combine price action with momentum indicators, like the Relative Strength Index (RSI). If you don’t know yet, the RSI has two levels we watch – the 30 and 70.
It’s pretty simple.
When RSI is below 30, it indicates the stock or exchange-traded fund (ETF) is oversold, and the stock could catch a bounce. On the other hand, when RSI is above 70, it indicates there could be a reversal in the current uptrend.
That said, you see RSI above 70, it’s an indication there could be a pull back. Now, if you like to see some price action confirming that, that’s okay. Basically, if RSI is above 70, you could wait until it breaks below 70… and wait for the stock or ETF to show signs of a shift in trend.
Now, you could look to lower highs and lower lows to signal that.
For example, here’s a look at the daily chart of what I’m talking about.
If you look at the chart above, you could see that last week, SPY’s RSI was above 70 and broke below. Thereafter, the stock had lower highs and lower lows… indicating a potential shift in trend.
Now, you could’ve used the RSI, price action with lower highs and lower lows, coupled with the price break below the purple line (20-day SMA) to get you out of the trade.
On Balance Volume (OBV) for Exit Signals
Now, you might have noticed the indicator at the bottom of the chart. This is called On Balance Volume (OBV).
The OBV is a great indicator to use in conjunction with the RSI, price action, and moving average price breaks. You see, OBV is built behind the theory that volume precedes price. That said, shifts in volume could give us an edge when it comes to exiting our trades.
When OBV rises, it indicates that the volume on days when the market is trending higher outpaces the volume on the down days. On the other hand, when OBV falls, it indicates the volume on down days is stronger. That in mind, a falling OBV indicates selling pressure that could foreshadow lower prices.
For example, here’s how you could’ve used OBV amidst this market selloff.
If you look at the OBV indicator at the bottom of the chart… you can see OBV is starting to fall, and we have price action to confirm that. Not only that, RSI just broke below 70, and we see price close below the 20-day SMA.
That in mind, there’s no one clear indicator that is better than the rest. You see, technical analysis is an art form, not a science. It takes a bit of practice and someone to hold your hand along the way before you can spot shifts in trend and protect your portfolio against down moves.
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