Who knew that a three-way tie in an Italian election could cause so much trouble? After expecting a sure-fire single party win, all of a sudden the political picture in Italy is murky, and murkiness is anathema to professional speculators.
Will the new government support austerity or not?
If not, then it’s fear city and European Sovereign debt all over again. We saw this drama play out on Monday and Tuesday, as U.S. Bonds rallied big and European Bonds rocked lower. Even gold got in on the action scoring its best day in months on Tuesday.
So is this the beginning of the end or simply a pause in the up trend?
So far the indictors that we use at ETFWarrior.com suggest that some more short-term weakness is in the offing, but that weakness should be bought into rather than sold into. The key here is to make sure that you use a stop loss point with all of your trading positions. This isn’t the time to buy in at a 45 degree angle and say, "Damn the torpedoes!"
Be judicious and start taking a look at some strong market and sector indexes to nibble on as they pull back. Let me be clear: this sell off looks like it still has a little more in it to the downside, but at this time, the pull back looks like a buying opportunity.
SPDR S&P 500 SPY
The S&P 500 looks like it wants to pay 1,460 – 1,470 a visit. This would be a move down to the 50 day-moving average. It’s going to have to take some pretty bad news to move this index much lower than that.
As such, I think you can be a buyer of the S&P 500 ETF (SPY) on a drop to $145-$146 with a $138 stop, and a price target of $155.
iShares Russell Index Fund IWM
Small Cap stocks have been lighting it up for months but I expect them to take it on the chin over the next few trading sessions. However, this is an index that should outperform on the way up should this pull back prove to be temporary.
I’d be a buyer at $85, with an $82 stop and a price target of $94+.
Remember, the key here is position sizing. Don’t buy so big that your palms start sweating! Take your stop loss level and make sure that if you get stopped out you lose no more than 1%-2% of your portfolio value on any one trade.
Successful trading is built upon trading with an edge across multiple trading opportunities; it is not built on getting lucky with one stock that zooms to the moon! Sometimes you’ll catch those stocks but that is very rare indeed and as an investment method it is more akin to buying lottery tickets than true professional investing/trading.
So be smart, be patient, and always remember, let the game come to you!