Regardless that the S&P 500 index seems to be relentlessly pursuing new all-time highs, the standard seasonal weak spot in October leads me to be very centered on threat administration proper about now.

After my newest dialog with fellow StockCharts contributor Joe Rabil, by which I acquired to listen to his ideas on threat administration, I needed to share some reflections on what threat administration might imply for traders as we get into the meat of the 4th quarter.

Watch the S&P 500’s “Line within the Sand”

My normal method to technical evaluation is to find out the present pattern, then determine what degree or sign would persuade me that the pattern had reversed. I name this the “line within the sand” approach, since you actually draw a line on the chart, after which do not give the chart a second thought till and until that line is violated.

For the S&P 500, which means I am laser-focused on the 5650 degree. The July peak was proper round this degree, together with the following peaks in mid and late August. The September breakout above 5650 was a key bullish transfer for the benchmark, and I might count on a break again under this value level might sign the top of the present bull run.

So till and until we see the S&P 500 break under 5650, then the present bullish pattern seems to be alive and properly!

Breadth Indicators Might Present an Early Warning

Now even when the S&P remains to be holding key help, loads of particular person names might break down earlier than the benchmarks. In reality, this occurs very often throughout main market tops like 2007! Market breadth indicators are maybe one of the best ways to research and observe this potential divergence, the place particular person shares begin to break down.

Right here, we will see the S&P 500 for the final 12 months, together with the brand new 52-week highs minus new 52-week lows, the brand new highs and lows for your entire NYSE, and the brand new highs and lows for the S&P 500 members.

Did you discover how all three of those information collection topped out in mid-September, and have been steadily declining since then? A wholesome bull market part normally sees an enlargement in new 52-week highs, because the main names are powering to the upside. However, in the previous couple of weeks, we’re seeing a vital breadth divergence that tells me to be skeptical of the present uptrend part.

Preserve Your Place Dimension Manageable

In my newest podcast episode with fellow StockCharts contributor Joe Rabil, he shared some phrases of knowledge on how to consider threat administration.  I significantly appreciated his ideas on place sizing, sharing that he normally dangers about 1% of his portfolio on every new concept.

Choices professional Value Headley as soon as quipped, “Should you’re having hassle sleeping at night time, your place measurement is just too huge!” By being considerate and intentional about how a lot capital we threat on every new concept, we will decrease the ache in case among the bearish indicators we’re observing really play out within the days and weeks forward!

Senseless traders ignore threat administration, focusing as a substitute on how a lot they stand to achieve in the event that they’re confirmed proper. Conscious traders acknowledge that they’ll typically be flawed, and by managing threat, they will survive to speculate one other day.

RR#6,

Dave

P.S. Able to improve your funding course of? Try my free behavioral investing course!

David Keller, CMT

President and Chief Strategist

Sierra Alpha Analysis LLC

Disclaimer: This weblog is for instructional functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your individual private and monetary state of affairs, or with out consulting a monetary skilled.

The writer doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the writer and don’t in any approach signify the views or opinions of every other particular person or entity.