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November - Feast Or Famine?

If April was the ignoring good sense and the sell rules, what happened in November was the epitome of emotional investing. In this case: fear. As the market bottomed in July, I made some selections that I thought were pretty solid: APKT, BIDU, FFIV, DISCA. Sadly, the results were not so great: I made 5% net on all four trades, even as SPY broke 115 for almost 10% gain. Ouch.

In what can only be described as a self-made fiasco, I let fear rule my trading rather than listen to the technical signals. Here is what happened. When DISCA reported earnings, it disappointed. As a result, the stock dropped. Since it fell below the bottom of the box, I sold it. From a Darvas standpoint, that is perfectly normal. However, what happens next is what killed my gains for the year.

At that time, the general market was experiencing a decline. Based on what I perceived to be lingering softness and on what occurred in January (stocks dropped but recovered) and April (stocks peaked then tanked), I decided to ‘protect my profits’ rather than risk another July debacle. So what did I do? I sold APKT, BIDU, and FFIV for nominal gain net.

Can you guess what happened after I sold those stocks? The minor weakness in the market recovered (SPY from 118 to 125), and subsequently APKT went to from $40 to $59 (I had a Feb-11 $40 Call) and FFIV went from $115 to $135 (I had a Jan-11 $100 Call). BIDU went from $107 to $100, but I had a Mar-11 $100 Call, which is still ITM as of this writing (4-Jan-11).

The result? APKT (+11), FFIV (+26), BIDU (+2). Total profit missed as of 4-Jan-11: $4,000 (round up). The sad thing is that from a technical standpoint, there was no reason whatsoever to sell any of those stocks at that time. So, just because I was afraid of losing my ‘profits’ from the year, I failed to capitalize on monster gains. APKT and FFIV alone would have been enough for a really nice car (not that I advocate such blatant consumerism, but the US economy is about 70% consumption driven).

(Incidentally, of the three, only BIDU is technically weak and should have been sold as it pierced the bottom of the prior box on heavy volume. However, I believe that BIDU is only being dumped because it is a Chinese stock, and not because of any inherent weakness (OK the CEO came out and said they were not going to grow as fast going forward as they have been, but since they were growing kind of fast (100%?!), it is not unreasonably to expect a decrease). On the other hand, both APKT and FFIV appear to be building a new base into the new year).

Although 2010 turned out to be a lackluster year, the lessons I learned from the experience continue to affirm not only how well the Darvas system can work, but also that removing emotion from trading is paramount (even if following strict technical rules gets you out of the stock at the worst time). More often than not, strict sell rules will save you money. Also, as I learned from my 2010 experience, strict sell rules can also make you a lot of money.

Good luck on your trading in 2011.

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