I was early in September by trying to locate a climax run in PTR in this post:
Petrochina (PTR) Climax Top?

However, the HUGE volume on the latest push to new highs clearly indicates something is going on.

As I mentioned in the last post, a climax top is where the stock has advanced for many months and suddenly races up for one or two weeks much faster than any prior one-or two-week period or since the beginning of the stock’s long move up.

And the stock does this on the largest volume of the run (something that didn’t qualify in my September post at $181). PTR finally has the extreme run with large amounts of accompanying volume. I do advise selling into this incredible strength, especially since Warren Buffett has sold most if not all of his holdings in Petrochina as documented in the SEC filings.

The title of the post is borrowed from the book “How to make Money Selling Stocks Short” by William J. O’Neil. It’s an ideal book for investors that focus on trading longer term trends and don’t necessarily do this for a profession (i.e.: day traders).

The book contains some excellent strategies for finding prime shorting candidates or stocks that are about to enter a declining stage that may offer excellent risk/reward setups for buying put options.

(CLICK FOR LARGER IMAGES)

I consider several of the techniques in the book to be reverse CANSLIM? Study the charts from the past that have setup ideal shorts and then screen for those same characteristics in stocks trading today. Many of the ideal shorts from past market declines have held the reverse characteristics of an ideal CANSLIM stock (that you would want to buy).

Many traders believe that the most obvious area to place a short would be near the peak of stock’s trading range but studies have found this to be untrue.

Characteristics of Longer Term Trend Shorts

• Most ideal longer term “trend” shorts take four to twelve months after the peak price to setup on the weekly chart with the majority of these shorts triggering between six to nine months.
• Look for stocks that had prior up-trends and support levels that can now act as downward resistance or entry areas.
• Once a stock tops and starts to consolidate, you want it to slice through the 50-d moving average and then the 200-d moving average.
• A crossover between the 50-d m.a. and the 200-d m.a. is ideal and is graphically presented on each chart in this post
• The odds of success increase with each failed attempt for the stock price to recover these major long term moving averages.
• Head and shoulder tops can also serve as ideal setups for potential shorts if they take at least five months to develop.
• A decreasing relative strength line and a negative pattern on the point and figure chart can also confirm that the stock is rolling over and setting up an ideal short.
• Finally, volume should be increasing and the stock should be under distribution as it violates the major moving averages and starts to break former support levels.

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The markets flashed a heavy distribution day Thursday as the NASDAQ was down 1.4% on volume 60% larger than the previous day. This was the largest showing of volume in two months and is not healthy because it was pure distribution. It was only the second distribution day over the past month so we can’t call this a bear run but please be on the lookout for a possible correction of 5%-10%. Technology stocks led the decline as BIDU gave back 10% of its amazing run.

The DOW was also down half of one percent as volume swelled 30% from the previous day.

The NASDAQ has run up more than 18% since I pinpointed the percentage of S&P 500 stocks above their 50-d moving averages crossed below the 20% oversold level. The secondary indicator was the final chart of study on August 16 as the indicator was hanging below the key 20% line as noted on this chart below (on August 16, 2007):

Ironically, this was the exact bottom as the NASDAQ has been on a rampage ever since, moving from a low of 2,386.69 to a high of 2,834.00.

The number of stocks above their 50-day moving averages crossed above the overbought level of 80 last week and we saw our first major sell-off distribution day yesterday. This doesn’t mean you must rush today to sell all of your holdings but do understand that the next sell-off is not far from happening. Study the chart below and follow the purple line to see where and when the market had peaks and valleys as related to the number of stocks on the S&P 500 above or below their respective 50-day moving averages.

This is only a secondary indicator but one of the most reliable while trying to look for clues to a short term market top and/or bottom. I have come to realize that the bottom signals have been more accurate than the topping signals over the past several years!

Use a stop, don’t use a stop. Make it a hard stop, make it a mental stop.

What do you do in a market like today when you have profits in multiple positions but you don’t want to give it all back? You want to continue to ride the winners but at the same time, you want to maintain the unrealized gains in your account.
HOW?

Most investors and many more market pundits continually talk about setting stops; they range from physical stops to mental stops to trailing stops to support stops to retracement stops or even moving average stops. It is easy to set a mental stop before you enter a position based off of your money management rules such as position sizing and expectancy but will you do it.

If you have a $100,000 account and want to risk 1% of the account on a $50 stock with an 8% stop; we know that the trade will allow you to buy 250 shares with a worst case scenario sell stop of $46.00 (assuming a 1-R risk of $4). This is wonderful but what should a trader do once the position gains 20%, 30% or 50%?

Where should the profit-taking-stop be placed? We want to eliminate the chance of losing the unrealized gain without cutting the stop too tight. We don’t want to sacrifice our possibility of riding a real winner, otherwise known as a home run stock (a 10-bagger as Peter Lynch calls them)! Loosen the stop as you feel comfortable as longer term trend traders will allow for larger swings and draw-downs from peak gains. Shorter term swing traders may agree with the tighter retracement stops explained below.

Many books attempt to explain how to take profits and several academics offer advice but most of it is fluff and biased to opinion. I have heard traders claim that they take a third of the position down after making a 20% or 30% gain while other traders take down half the position once a gain reaches 50%; but is this the correct way to manage money and positions?

Keeping things simple, we could implement a combination of a trailing stop and a retracement stop based upon the actual gain at any point in time. In a bull market (like 2007), I will allow the system to loosen itself so I can handle a healthy pull-back without selling before a possible larger move. I would increase the size of the profit retracement stops when things are trending higher on a weekly basis. Let’s focus on a method for locking in profits without giving back too much as a swing trader.

For the sake of this example, I will continue to use the trade suggested above as the round numbers should be easy to follow.
Account Size: $100,000
Risk: 1%
Stop Loss: 8% (varies based on risk/reward setup)
Share Price: $50

Shares to Purchase: 250 or $12,500
Sell Stop: $46.00
Worst case loss: $1,000 or 1%

If you are unsure of how I came up with the numbers in this example, please take the time to visit my position sizing calculator and the post titled: position sizing and expectancy.

Assume we place a position and it is up over 20% after the one week of trading. What should I do to protect the profit I have already made?

Scenario #1:
At $60, I will set a stop based on a 30% profit retracement.
To do this, you need to multiply the profit of 20% (or $10) by a 30% stop: $10*30% = $3
At this point in time, I will look to close the position and lock in gains if the stock drops more than $3 from the $20% threshold ($60 in this case). My trailing stop is now $57 which guarantees me a total gain of 14%.

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Are we watching a climax top in Petrochina (PTR)?

If so, now is the time to dump shares and protect profits. So, you don’t want to dump them all; then sell half or at least a third of your position.

I have been taught to always sell all of a stock that has a climax top (CANSLIM explains: this is where the stock has advanced for many months and suddenly races up for one or two weeks much faster than any prior one- or two-week period or since the beginning of the stock’s long move up). Petrochina is currently experiencing a dramatic push unlike any of the previous tops it has made over the past couple of years.

Another rule I follow explains that you should sell when your stock exceeds an upper channel line drawn across three price peaks over a period of many months on a weekly chart. We can clearly see that PTR is now violating the upper trend channel after it touched three prior price peaks.

I can’t tell anyone what to do and I don’t want to either but I love presenting what I see based on technical analysis. PTR was a buy for me in February but I now see it as a sell.

What do you see?