Those last few words are those of Don Worden from the latest Worden Report in Telechart software. I am pleased to see That Don believes that we have begun the pullback. In my last newsletter, I suggested that we should see a pullback. Well it did not happen early in the week. However, Take a look at the 3 charts below and I believe that you will agree "The Pullback has begun"  just as Don Worden said. In case, you are not familiar with Don Worden, the father of the Worden Brothers, let me tell you that I think he is one of the sharpest charters ever. The daily reports he puts out are a wealth of knowledge for the typical investor.

Take a guess at which chart is which index. I'll tell you below. Why is this important, you ask. Well, I think it is because it shows which index is leading the other two.


WOW! they look almost identical. That is not unusual for these 3 indices.

It is leading whatever upward movement that has and will take place. The "Techs" almost always lead the rally. Notice how the price broke the 50 SMA but failed it on Friday. The candlestick pattern formed at the top is like very close to being an Evening Star. However, it is not an Evening Star because the middle candle did not open above the previous candle and the last candle did not open below the previous candles lowest part of the body. Still expresses the trader sentiment much the same as an Evening Star. I expect more downside, to the 20 SMA which should provide support. That will be a 50% retracement of the previous wave up. If it breaks the 20 SMA and closes below it then there is an excellent chance it will test the March 9th low.   

It has the same trader sentiment that was shown in the Nasdaq. The difference is the first candle and the middle candle forms a Dark Cloud Cover which is a little more bearish than the candle on the NASDAQ because it retraces further down into the body of the previous candle.  If the SP500 pulls back to the current 20SMA that is the 50% point of the wave up. Again, if that happens we stand an excellent chance of testing the March 6th low.

The middle candle does qualify as a Dark Cloud Cover and only misses being a Bearish Engulfing by 5 points. It's so close that many would say it is a Bearish Engulfing.  Strangely enough, once again the 20 SMA is very close to a 50% retracement. If we break the 20SMA on the pullback then we have an excellent chance of testing the March 6th low.

Do you find it amazing that the 20 SMA is support for all 3 indices? You shouldn't, as the 20SMA offers major support and resistance on indices and stocks.


If you entered any of these trades, hopefully you closed them out either on the Thursday closing or on the bearish conformation on Friday's open. At the very least move your stops to protect your profits.

Better yet, I hope you took the time to study the spreadsheet and follow the plan. If you did not then you might want to go back and review the 03-10-09 and 03-15-09 newsletters. At the far right of the second part of the spreadsheet you will see the yellow highlighted cells. In row 3 you will see that I plan to take 50% at target #1, 25% at target #2, and the remaining 25% at target #3.

You are probably asking how can I make sure I take the profits at those exact price points. Well, if you have a broker that allows you to enter multiple orders (bracket) at one time you can execute a One-Cancels-Other (OCO). With an OCO order you specify the entry buy price, a stop-loss amount sell price and the profit amount sell price. Now you have your open position in the stock plus you have both a stop-loss sell pending and a profit sell pending. The sell order that get executed cancels the other remaining orders, thus the name One-Cancel-Other. Initially you will do this for the stop-loss and target #1. When the Sell for target #1 get executed then you have to issue another OCO for the new stop and Target #2 and repeat for target#3. You can adjust the number of shares and price on the sell orders to control the percentage you exit on profit. The stop-loss sell order would be for all shares you have in that open position.

Thinkorswim, Etrade, (my brokers) and Interactive Broker offer these types of orders, though they call them by different names. Call your broker if in doubt. Each broker handles orders differently. So make sure you fully understand how your broker handles orders. 

I hope you follow all of that discussion because this procedure allows you to sleep much better knowing you have set both the profit and loss limits.

I have created a table shown below to show the profits you would have realized if you had used this method to purchase all 10 of the stocks. If we followed the plan exactly and purchased all 10 stocks we would still be in 9 of the trades. You can tell the remaining opens by the 0.00 in Profit taken at target #3. Three of the stocks have yet to reach target #1, again zeros in the profit taken cell, 5 made it to target #2 and only 1 made it to target #3. In my trading this is fairly typical. I seldom stay in a position long enough to reach target #3.

Seldom do I ever end up following exactly the plan.Because, in using the trailing stops to protect the profits I will be taken out when it retraces more than I allowed. I always record in my trading journal  why I exit the trade. I wait 5 days before I annualize how I did with the trade. I do this is to remove my emotions from the analysis.   



Seriously, folks I am expecting more pullback, so please don't give back all your profits. Move your stops up to minimize your potential profit erosion.

In the previous newsletter, 03-15-09  I showed you my Price Projection Calculator and stated:

"Using our Price Projection Calculator and entering the previous pivot high (01/06/09 - 9088) and lows (11/2/08 - 7449 and 03/06/09 - 6469) we see a 38% retracement is 7469 and the popular 61.8 extension is 7481. That gives us a confluence of the 2 major retracement methods. To date our retracement has been 29%. "

This past week we retraced a little higher to 7572 before starting a pullback. That was a retracement of 42%. Failing to make a 50% retracement is an indication of a weak rally. Yet another reason I suspect we will break the 50% retrace on this pullback of the indices.

In case you missed last week's newsletter here is the calculator screen shot that shows the price reversal points and retracement price points 


   

 

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As always I want to hear your thoughts on these and any subjects. Please, feel free to send an email with your suggestions, complaints, and comments to    kermitp@tradingourway.com  
 
Thank You, for taking the time to read our newsletter and good trading to all,
 
           Kermit Prather