If you follow my articles, you have probably surmised by now that I am a technical trader. That's because technical indicators are immediate. They are void of emotion and reside in the present tense. Technical indicators are beacons of the immediate future (regardless of timeframes). From one minute charts to weekly charts, technical indicators (if interpreted properly and adhered to) can increase the probability for a successful trade.

Now - don't get me wrong, I have a special spot in my heart for all Fundamental Analysts. I hold them near and dear, right next to weathermen - as neither have ever proven to me (with any degree of accuracy or consistency) to be able to predict a single moment past current prevailing conditions. They both caveat their respective forecasts - cloaked in math and percentages. If a weatherman tells you there is a 4% chance of rain - he's a winner either way. If it is sunny - he'll tell you that little rain cloud narrowly missed you. If it rains, it was not as if he did not warn you. Same goes for Fundamentalists. I love when a stock has fallen so far from Grace (ridiculous declines) and a top-tiered analyst will "down grade" the stock to sell from hold - or to hold from buy. Gee - thanks for downgrading that stock when it is trading in the $20s. Where were your words of wisdom when it started to unwind at $70? Yet - for some reason, these analysts still carry tremendous clout (albeit, usually short-lived). Downgrading "road-kill," or upgrading a new 52 week high is not rocket-science. But then again, neither is today's forecast..."50% chance of rain."

But let's assume these Masters of the Obvious will continue to exist - and sway the markets with 3%, 5% - even 15% erratic moves in stocks - merely by voicing their opinion. I'm OK with that and can trade around it. But what I can not/will not do, is follow their advice after I am already "pot-committed" into a trade. Here's an example...

A friend of mine, who we will call "Steve," (and for those of you jumping to conclusions, I am NOT Steve), made a portfolio-damaging decision to switch teams during a trade. He entered the trade as a technician, but exited as a fundamentalist. This is not uncommon - but can be punishing. Not only he did he secure a write off for next year's taxes, he also watched in disbelief as the stock in question went meteoric shortly after his sale. Here's what happened:

It was cool winter morning, and "Steve" turned on CNBC and fired-up his laptop - screening for pre-market movers and checking his "favorite" list for opportunities (or...The Perfect Set-up). He came across one that looked pretty good. It was a solar company. It was pretty battered, volume was just north of anemic, and it had obviously fallen from Grace. The sector, in general, was in a cooling phase - and arguably attempting to consolidate recent run-ups. But, this little stock had a P/E that would make GE look like a 1999 dot.com play. With such a historically-low P/E, Steve decided to put it on his "radar screen."

The markets opened and Steve's new-found prospect continued its descent. Marginally lower, but RSI, ADX and Stoch were all flat-lining or showing signs of life. Steve was using daily charts - and knew it was a tad-early to be committing capital. Later that day, it re-tested a recently posted intra-day low and bounced back nicely - closing the day down a mere 20 cents. Steve was frustrated that he had "watched" all day - and had not pulled the trigger. But as a disciplined technical trader, he knew his actions (or inactions) were spot-on, and would probably save him in the long-run.

A day or so passed, and Steve re-visited his little solar friend. A great base had formed, and PPO was crossing. RSI was just below 50 - but looked like an indicator on a mission to crack through that barrier. Having recently tested that intra-day low, Steve knew he had good support on the stock. So...in he went. He took a decent sized position and had already come to terms with his possible down-side risk. For now, there was nothing to do but wait.

As the weekend approached, Steve looked at his position. There was the usual oscillation between profit and loss - but the indicators were strengthening (ever so slightly). It was pretty clear to Steve that this was not going to be a "V" bottom - but on a percentage basis, Steve felt the reward was worth the risk. He was well above the intra-day low (a.k.a. his mental stop), although, so was his entry point. So with a marginal gain, he held through the weekend. Charts did not tell him to sell - so he didn't!

Over the weekend, there was a less-than-favorable article in a well-renowned, financial publication. While not specific to Steve's investment, it certainly took issue with the sector as a whole. Other stocks were specifically targeted with downgrades and disparagements. It was apparent that the dreaded fundamentalists had lobbed a grenade that was sure to cause some damage. Sunday night would prove to be anything but restful for Steve - as the gnawing in his mid-section grew in anticipation for Monday's opening bell.

Ding, Ding, Ding, Ding, Ding, Ding, Ding...by about the 3rd "ding," Steve was revisiting those previous intra-day lows. Stock opened Gap-Down - and was flirting with his mental stop (at points surpassing it - but only momentarily). Technical indicators took a bit of a hit as well - as lines started to converge and momentum was halted. Volume ticked up (substantially) - but was this a mass-exodus, or some big-boys calling the bottom? The stock managed to close off of its lows of the day - but Steve was clearly in the red - and was beginning to doubt the position (not as a technician, but as a fundamentalist). In the after-hours, the slide continued (but on meaningless volume). To Steve, this was just another cut into his already embattled position. He called me to discuss his dilemma - and I asked him what the charts were saying? He replied with "The charts can't help me now," he said, "By the time the charts reverse, I could be down thousands." Fair enough...but has your mental stop been compromised, I asked? He said - on an intra-day, yes - but closed above it. I left him with simple advice... "A close below your mental stop - and you're out. Otherwise, you should anticipate another week of basing, as too much short-term damage had occurred." I cautioned him that this would NOT be a quick fix/quick profit trade. He was going to have to work for it. But, as long as his indicators do not reverse, and the stock holds its support levels, it is imperative that he stays the course. We hung up, but it was clear my comments were of little comfort.

Two days passed, and the stock muddled through - posting penny gains or penny losses (although volume had increased). Around 3:30PM (ET) on Thursday, my Blackberry went off - and Steve had forwarded me his trade confirmation (a ritual we always do to keep each other in the game) of his sell-order. He had enough and locked in a modest (albeit meaningful) loss.

Before I called him, I pulled up the charts and did my own assessment. When I got him on the line, I asked "why?" He was jubilant, and it was clear he had washed his hands of this trade. He concurred that there was no violation of his technical indicators - nor had it posted a closing price at or below his mental stop. He just thought AFTER FURTHER CONSIDERATION OF THE ARTICLE that this sector was in trouble - and that this company would be sucked into the vortex of woes. "You thought?" I exclaimed. I reminded him that we were technical traders and that we leave "thinking" to those more capable! While my humor failed to hit its target, he reiterated his concerns over the article and the "opinion" of the author and analysts quoted. I knew he was now in a better place (mentally), so I congratulated him on his decisiveness, and told him to delete the ticker from his charts. No sense looking back - just move forward.

I think you all know how this story ends. His 3% fundamental loss was immediately followed by a 35% "technical miss." While painful, there is a valuable lesson to be had. No matter what your reasons, no matter what your logic, no matter what indicators or commentary you follow, no matter the timeframes you trade by...it is imperative that you employ the same measures and disciplines to exit the trade that you used to enter it. If you enter on a 60 minute, don't try to re-justify your position based on daily (after your 60's have failed). If you enter on a technical basis - don't get whipsawed by hearsay or "expert rhetoric." Don't be talked out of doing what you do - and what you know has worked for you in the past. Not all trades are home-runs. Not all trades yield fruit from day-one. The best counsel, advice and guidance for you, exists within you. Do your homework, follow your rules and keep focused. Taking a loss is not a bad thing - it happens to everyone now and then. But taking a loss for no logical reason, well - that's a crime.

Happy Trading!

Peter E. Breen
Managing Partner - The Vokser Group

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