In Case You Needed a Reminder: Never Fall in Love With a Position or Market

Thursday was a reminder to never fall in love with a position or a market. Nothing goes straight up forever. Take profits and use trailing stops.

This must be the fifth or sixth time I have discussed using trailing stops in the current environment. Repetition creates learning. You don’t tell a child “No” one time and expect them to learn. You don’t train a dog to sit on the first attempt.

I’m not calling traders children or dogs, even if we sometimes act like children. However, markets like this remind us that learning is a lifelong experience, and we will need occasional reminders.

While down days and reversals never feel great, a market down 1-2% is usually not damaging. Most of us should even be able to tolerate the gap and fade. After all, it came from new highs for several indexes and many stocks.

There are a few warning signs, though. In a single session, the SPDR Gold Shares ETF GLD action broke below the 10-day and 21-day exponential moving averages (EMAs). Gold is off 5% in a short three days and needs to find support soon, or that drop could double to 10% in a few days to a couple of weeks.

The SPDR Dow Jones Industrial Average ETF DIA, Financial Select Sector SPDR Fund XLF, and iShares Russell 2000 Fund IWM, among others, saw the same knifing action through the 10-day and 21-day EMAs. Energy, in the form of the Energy Select Sector SPDR Fund XLE, appears particularly bearish. If we cannot muster a rally into the long weekend, this also risks a 5% move lower before finding technical support. Big names like Disney DIS and McDonald's MCD look even worse.

This isn’t to say I’m bearish on equities. I’m not. But I must acknowledge we have some short-term risk based on the recent action.

Pick your spots, use your stops, and protect your capital and hard-earned gains.

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At the time of publication, Byrne had no positions in any securities mentioned.