Over the past two weeks, I have been stopped out of many quality setups. In addition, I've been seeing many leadership stocks such as TSLA, NIO, PTON, CRWD, TDOC, and NVCR breakdown and lose their 50-day moving averages. This is not the type of action I like to see, especially after such a sustained uptrend like we've just experienced. This may be a sign of short-term trouble ahead.
Sentiment has been at an extreme for months and I was on the lookout for a correction in early January and then again in late January. When market action started to shapen up, I was quick to reverse and take the best setups I saw such as TLRY. My philosophy is to be flexible and to follow the market's lead. When conditions appear to be strong, I'm bullish. When I see leaders break down, I get defensive. The key is to do more of what works and less of what is not working.
While I still hold three positions, I have my stop loss on all of them at breakeven. When the market flashes warning signs like it appears to be doing, you want to think defense first. I'm still very bullish long-term, but have no desire to trade through a difficult environment. If we get bullish reversals and quality setups, there will be plenty of buying opportunities again and I will be quick to jump in. However, the key is to make sure you have enough "bullets" left to fire when those opportunities arise. I used to make a habit in my early years of running up my account only to give back all my gains during a correction. The financial and psychological price I paid is not something I would ever want to experience again. I learned the hard way that when the leaders start to break down, forget about trying to throw Hail Mary touchdown passes. Instead, focusing on playing great defense is what wins the game of trading.
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