A Rally Stumbles

What if you set a profit target for your trade at the envelope but later come to believe that the rally has even greater potential? How much longer can you hold? Experience has taught me that it is better not to overstay trades. Still, occasionally situations occur in which a rally rockets higher, and it feels tempting to hold on for a bit more than initially planned.

Once prices blow through your initial target, where will you take profits? There is an option that appeals to me because it feels the least stressful. I wait for the first day when the price fails to reach a new high for this move and sell either near the day’s close or soon after the opening the following day.

Here, as with everything else in trading, it is important not to try to reach for extremes. The top tick of a rally is the most expensive tick in the market—fortunes have been lost hunting for it. The logic behind the “no-new-high” tactic for a fallback target is straightforward. When a super-powerful move cannot reach a new high, it gives you a sign that the bulls are starting to run out of breath.

Figure 4.20 YHOO, daily chart

Of course, they may regain their breath and reach even higher, but I have long ago given up on trying to catch the absolute top. Remember, the top tick is the most expensive tick of every rally.

Figure 4.20 shows a YHOO rally that began in October. At first, it moved like so many other trades—below value in October, followed by a rally to the upper channel line, then a drop back to value in October, followed by another rally to the channel. Following the second rally, prices barely declined, showing that the bulls were very firm and not giving way to the bears.

After prices touched their value zone in November, they staged an explosive move to the upper channel line. They reached the line within one day and rocketed higher the following day. On the third day of this rally, the bulls appeared to either have lost confidence or taken a rest. The range on the third day was narrow and the volume thin, reflected by falling Force Index. Even more important, the bulls failed to lift prices to a new high for this rally. That was the signal to sell.

Prices did rally a little higher on subsequent days, but the bulk of the upmove was over. Three days after the “no-new-high” day, prices began to sink back towards value. Selling early beats selling late. Only someone with a crystal ball can call the top of every move, but those who live by a crystal ball must get used to swallowing a lot of ground glass. It is important to trade without regrets about missed opportunities. Remember—the power word is “enough.”

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