Get Out of Broken Pattern To Avoid Serious Injury

An important step in becoming a consistently profitable trader learning how to avoid big losses. Traders must think fast and act decisively when a pattern is broken. Over the last couple weeks, many, including us, identified the clear head and shoulders pattern that could forecast lower prices to come. Still, with earnings season approaching, we noted it was important to stay on your toes and remain flexible in case the landscape changed. Monday, the environment changed significantly with the Meredith Whitney upgrade of Goldman. Rumors of stellar earnings from Goldman began to permeate the market, and the stock made a large run Monday ahead of earnings.

Shorts had a window to cover Monday on those rumors and the Meredith Whitney upgrade. Stubborn shorts fell directly in the dangerous trap, while those who took the chance to get flat escaped with only cuts and bruises. When S&P broke above 883 that’s when prudent shorts covered. The chorus was calling for the breakdown, but when the pattern was violated, it was time to pack up the bags and head home. We are flat now, trading ranges and stock picking as earnings have ramped up volatility. We caught a four-day move higher of about 8%, and although we can go higher it is hard to initiate a new long here. That next target will be the top of the range around 955, but we can definitely use a day or so rest before we attempt to eclipse that level. Be stock selective, with a strong eye looking toward the financials and tech stocks for the best action in the current market.