Did I Lock-in Gains or Losses??

I don’t often trade individual stocks. My focus is on TSP and the Exchange Traded Funds (ETFs) that make up the Sectors of the market. However, I occasionally dabble in individual stocks if I see something that interests me, from a technical perspective. In this post, I’m going to lay out one of my recent individual stock trades. While this is not a trade within the TSP, I use the EXACT same methodology when making TSP reallocation decisions. This trade is a great example of when to buy, how to watch it climb, and when to sell. Here’s the question to consider as you’re reading this post:

Did I Lock-in My GAINS OR Did I Lock-in My LOSSES?

We’ll come back to this question at the end of the post…

The Set Up

A friend of mine had a position in a stock and asked me to take a look because she was thinking about selling. The first chart below was on the day I first pulled up the chart of the stock. What I saw was a beautiful Cup & Handle Pattern coming off of a huge collapse in September 2020. This is a Classic bullish pattern… My recommendation to her was NOT to sell, but to buy more. This stock was getting ready to explode higher! In fact, I put it on MY short term watchlist.

The Buy

The next day I took a look at the chart of AMRN just after the open. It had gapped up, continued higher throughout the morning, and broke thru the resistance line at $5.40. I bought AMRN at $5.55 per share that day. By the close, you can see that AMRN had rallied 9.69% and broke thru the resistance level on huge volume! Additionally, the technical indicators had turned positive. There are NO guarantees but, the odds of AMRN moving higher were definitely in my favor…

The Sell

Now let’s look at what happened over the next few weeks. AMRN did continue higher. Price found support at its 10DMA line around 20 January and exploded higher again. Finally in early February, AMRN exploded higher one more time, just missing an intra-day high of $10 before reversing to close below $9.

Over the course of the next several days, AMRN began to break down. We got a crushing reversal day on 9 February and then a close below the 10DMA on 10 February. When the intra-day price broke below the 10DMA I sold the stock for an executed price at $8.

Before we get to the end of the story, let’s recap and go back to the original question of the post… I bought the stock at $5.55 out of a classic bullish pattern. The stock rallied to a high of just under $10, almost a 100% gain on my money. I sold the stock at $8 when it broke down thru the 10DMA. In the end, I made a profit of just under 50% on this trade, over the course of a few weeks.

So here’s the question… When I sold the stock at $8, did I lock-in a 50% gain OR, did I lock-in a 20% loss from the high of $10?

The answer is Yes, both… There isn’t a Yes/No, Right/Wrong here. It really comes down to how you think about managing your trades (TSP reallocation decisions). From my perspective, I put a 50% gain in my pocket AND guaranteed that I would take no further losses on the stock. Some of you are reading this and thinking, “But you owned it at $10 and sold it at $8. That’s a 20% loss! And, the market always goes up eventually so, you should just hold it and it will come back. If anything, this is an opportunity to buy more when the price is lower!”… Again, there is no Right/Wrong here. It’s all about learning how to maximize gains and minimize downside risk. Let’s see where AMRN is today, 04 March 2021.

The Rest of the Story…

Since I sold AMRN at $8, price has continued lower and is almost back to my original buy price. IF you are a Buy & Hold investor, and you bought the stock at the breakout, you have just completed a round trip. You are back to even. If Technical Analysis is your methodology, you put a 50% gain in your pocket about a month ago and you’re using those gains toward your next investment…

Bottom Line

Read this post a few times and let it sink in… This is a great example of utilizing Pattern Recognition and Technical Analysis to maximize gains and minimize downside risk. Did I try to “Time the Market” here? Obviously not! I bought the stock on a breakout from a classic bottoming pattern. I watched the stock rise along its 10DMA line. I sold the stock when it violated that 10DMA line. This is not Market Timing and it’s certainly not Buy & Hold. This is a real-life example of what applying Technical Analysis can do for you (and your TSP account) IF you learn how to use the tools…

Ps. As of today, volume is decreasing as price is falling and RSI is oversold. A bottom in price could be close… I will buy this stock again on the next breakout and do an update to this post.

We will discuss this trade, and how the concepts are the SAME when making TSP reallocation decisions, in this Sunday’s Weekly Update Show. Don’t miss it!

Jerry