Thursday, January 08, 2009

How to Sell Your Positions

Top Line: Stock market is about ready for the rally we have been expecting in front of the Presidential inauguration.

The stock market tried to go down early on Thursday but couldn't stay down. It seems the huge job losses that are due to be reported on Friday morning didn't scare anyone off near the end of the day. The report Should generate some selling but it is released an hour before the opening bell...so a sudden drop could turn around before the opening bell. It's difficult to know.

What we Think is the time to sell will come up quickly in the next few weeks and we should be getting ready for those sales. As for us, we have several different accounts and several different holdings. How do we get out of all of these positions when we want to? We can't really wait until the point where we can sell them because we can't put all of the orders at the same time. Plus, we may be at work.

One of the things we have to decide is the price. How do we do this? The only thing that matters is the place we can sell. What we should Not consider is what we paid for it although that's a difficult thing to avoid. So, what do you own? About what price do you think you can get for it if the market moves up about 15% in the next ten days? Where is the stock/ETF in relation to its 200 day SMA (simple moving average).

Let's get specific and talk directly about GDX. Before we forget, let's talk about tax consequences. If you own GDX in an after tax account, you may want to do some things differently than we are going to explain tonight. Depending on when you bought a stock, you could hold it for the long term capital gains tax. But, that's for a different day. Back to the tax deferred sale.

We think that GDX can get to 37 in the next week or two. What should we do? Should we put in a good till canceled (GTC) order to sell all of it at 37? If you have 100 shares, that may be an ok thing to do but even at that level, 37 may not be the right price. The round 37 doesn't seem like the right number, we like to look just over that number, say 37.13 or 37.19.

But, maybe you have 1000 shares and what do you do then? Let's say you are willing to layer five or six trades into the stock runup. If you think the price should go to 37, then what you can do is put in a 100 share order in around 36.83 and then another 100 share order at 36.96 and then maybe a 200 share order at 37.13 and another one at 37.33 and another at 37.57 and then one more at 37.91. Or, if you think you may get higher prices, you could start with a 100 share order at 36.87 and then other orders, like five or six, up to 39.97.

We are now wondering when we should start putting these orders in. Could we do it tonight? Yes, we could but we don't like to put in orders that far in advance. We would wait until next week to see what GDX is doing. This can be a dangerous choice because it could pop up there and then come back down before we get our orders in so we will be putting orders in early next week.

You might be wondering how this works in real life. If you have 1000 shares you may want to just go ahead and put in orders for about 600 shares, a 100 at each level. We wouldn't use these prices but here we want to indicate how this works.

Let's say you put in 100 shares orders at 36.50, 37, 37.50, 38, 38.50, 39. Let's say one day GDX moves up to 37.75 and then falls back below 37 by the end of the day. That would mean that you sold 300 shares, 100 at 36.50, 100 at 37 and 100 at 37.50, and you would still have orders for 300 shares in place.

You remember that you have 400 shares with no orders. Maybe you would put in two more orders of 100 shares apiece back in the 37 and 37.50 levels leaving 200 shares without orders. So, if the next day GDX moves up to 38.25, then you will have sold another 300 shares, 100 at
37 and 37.50 and 38. Now we would have 200 shares with orders and 200 shares without; but, you have done a pretty good job of getting good prices. Maybe that 39 order is too high.

This system works pretty well and you can do your setups in the evening when the market is closed and you have no emotions involved. Plus, it's fun. Selling into strength is something that feels pretty good.

One nice thing about this is there will be funds to start going the other way. We'll talk about that next week as well.

Do your homework this weekend and find out what your exit points will be. Then next week we can get specific.

2 comments:

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