Suncor, US Bancorp and MasterCard: Using a Stop Loss When Investing

I want to point out three charts that I've been monitoring. Each chart points out a separate staple of technical analysis. Yet, at the same time, they all illustrate the use of a stop loss and how you can identify where to place your stop on your holdings.

1. Support/Resistance. These are areas on the chart where you can visibly see a stock either having trouble breaking through at, or finding support at. These are visual representations of the price action in the underlying stock. In this specific example, I want to focus on how you can use support/resistance to your advantage in terms of either placing stop losses or price targets. In this case, US Bancorp (USB) was considered to be a conservative bank. However, since it is still a bank, it is still a good house, in a bad neighborhood.

The dividend is nice and all, but the chart gave me a clear signal after it could not find support at a level of past support.As a result, I placed my stoploss right below this area of support. So, if the support failed to hold, I knew the stock would be headed lower and I would need to get out. And, that's exactly how it played out. On the chart, you can see a strong area of past support around $28. So, I placed my stop below that and got stopped out accordingly once it broke down past support. This stop loss saved me from the ensuing 25% drop USB experienced.

This is the perfect example as to why you should have a stoploss on all your holdings. (For those who are curious, I was only in USB to begin with because I was employing a buy-write strategy. It has a solid dividend, so I was pocketing the dividend (5%+) and then writing covered calls on the name every month to pocket more money since the stock essentially traded sideways for a long time).

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2. Trendline. MasterCard (MA) is sitting on a longer term support line right now. Once again, the quote of the week has been "The trend is your friend." Once the trend ends, get the hell out. So, take all the lows of the trend and connect the dots making your trendline. If the stock breaks below the trendline, it is most likely going lower and you need to get out. Place your stop loss accordingly. For instance, in MA, I would be buying this dip as it is on longer term support from the trendline. Secondly, it has filled the gap (but that's a whole other topic). Then, place your stop just below the trendline. If it breaks, it's going lower. For the graph below, focus on the green trend line, I've drawn in.

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3. Head and Shoulders Pattern. This pattern pops up all over charts all the time. In addition, if you can spot it, you can benefit from it, as this pattern is typically bearish. For this example, I want to focus on Suncor (SU). I'm actually very bullish on this name for the long term. However, for now, I'm using the technical analysis to my advantage. I've spotted a head and shoulders in this name and it could potentially trade much lower (especially if oil prices continue their decline).

I've highlighted the two shoulders and the head with green circles. As you can see, the head is the peak of the formation and the shoulders are on either side, at the same price level. Then, the bottom of the formation is accompanied by a 'neckline' where the two shoulders form their bases.For SU, this neckline is at $55 and is the make of break point.

This level represents support as the stock has previously bounced twice at that level. Therefore, if it breaks the level to the downside, the stock could trade much lower. Now, for all intensive purposes, this stock could just continue to trade higher and not complete the H+S pattern. However, the point is that once you identify the neckline, you've identified your stop loss. For SU, you'd place a stop loss below $55 and call it good. You can get short anywhere below that level.

Alternatively, if SU holds that level, then you can get long. For now, the pattern is an *anticipatory* head and shoulders. It hasn't actually completed the pattern so I am technically jumping the gun here. If it trades down to $55 and then breaks the neckline, then it will be complete. Again, for all I know, this name could continue to march higher. But, it's just something good to consider when managing your holdings. Also, note that this chart makes uses of support/resistance as well (the neckline).

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Comments

[fxtrader07]

another one obviously confusing trading with investing. your points are well taken for traders. for investors they make no sense, though. i couldn't care less about some hs-patterns, triangles, wedges, indicators or whatever. what i am interested in as investor is the business, its prospects and its value creating ability. and if all those are o.k and fine long-term then i am surely not selling because some neckline has been broken thereby likely surrendering my shares at huge discounts to intrinsic value. rather, i hold or i moght add at rock bottom prices

[BxCap]

I think pattern recongition is important, especially for people that have suffered head trauma. Trading techniques like these are a way to self-diagnose brain impairments, and are therefore tools of great value to individuals living far from population centers who may have incurred undiagnose brain damage.

[WACG]

Laying on your back in a park on a fine summer day watching the clouds move by and looking for images of bunnies, boats, and horsies is much more pleasant. Looking for PREDICTIVE price patterns in a price chart is a fools game intended for those that are clueless about the price generation process. Nonetheless - have a nice day and thanks for playing!

[athenian]

Given the title of the article, I was hoping to find a reference to a software program that continuously tracks movements of selected stocks and triggers alerts after an investor has set stop loss percentage amounts. For example, when, say, SU is rising in price, I want to set a trailing stop loss of 10% so that as soon as it declines 10% from its high, I receive an alert to sell. Does anyone know of such software? At present, I have to review all my stocks one by one, every day to see whether they've dropped 10% (or whatever) below their all-time highs.

[Popska5125]

I use TD Ameritrade and can set alerts, but the alerts must be set by stock, not by portfolio. But they do send an email (and can send a mobile alert) when it hits my designated point. Great service.

[foobah]

Marketwatch and Yahoo, among others, send email alerts.

[greencapitalist]

trend for mastercard?

how short sighted the author is. from a technical point it is okay to see chart. but from long term perspective mastercard was a strong buy at 240/250/260. it is one of the cheapest stock trading at the same rate as its growth.

check at matrader.blogspot.com

[greencapitalist]

fxtrader07,
bro, you nailed it.

if the company's story is intact and market thrashes the stock, just add it. it just does not get better than that.

mastercard 240/250/260 was a gift not a trendline broken stuff.

[athenian]

Many thanks to foobah and Popska5125 for the suggestions. I wouldn't switch brokers (to TD Ameritrade) to acquire the alert feature but I'll follow up with Marketwatch and Yahoo.

[marketfolly]

greencapitalist,

i guess you misread what i was saying with MA. i was saying *if* it broke the trendline then it would be triggering my stop loss around 235. Seeking alpha didn't publish another piece of mine where i stated I was buying at 243 since it filled the gap. I'm with you, love MA"s fundamentals and the story of global transition to plastic.

athenian,
sorry you were confused by the title of the article... SA changes the titles of my articles all the time for whatever reason..

[greencapitalist]

gotcha market folly. if you had got in at 243, it is a great thing.

even at 280, it is trading at 25 times or so for 2009 valuation for a company that is growing close to 30% and expected to grow at the same rate.

the market has simply thrown the baby out of the bed.

expect the master to scroch and go to 350 after july 31 smash beat. they should definitely do a stock split as average investor is increasingly getting priced out due to the stock price.