Home Depot (HD) Trade
What Does the Market Look Like?
As always, I look at what the market is doing. Today, it looks like SPX is bouncing off resistance so I’m looking for short trades.
Finding a Trade
HD is on my short watchlist and it meets all my requirements for a short trade. It follows the market as seen in the charts below, and its primary trend is down.
The 6 month daily chart shows HD has been making lower highs and lower lows, and earnings isn’t coming up any time soon.
The 3 year weekly chart shows an area of resistance, but it’s well below the current price, and most likely, I’ll have exited the trade before it even reaches this level.
I took the current red day as a confirmation that the market is reversing so I sold HD towards the end of the trading day at $169.13
Managing the Trade
Since it seems to be staying below the 50 day moving average, I put my stop just above it at $178.20.
Here’s my calculation for the number of positions.
$178.20 – $169.13 = $9.07
I’m willing to risk about $250 per trade which gives me 27 shares at my sell price.
$250 / $9.07 = 27
I shorted an even 30 shares so if I hit my stop, I’ll lose about $272.
Gah! My first trade of the year and it’s a losing one. The market wasn’t reversing like I thought. It went up the next two days, hit my stop, and I bought back my shares at $178.78 for a loss of $289.50.
Could I have avoided this? Looking at the chart, there wasn’t really a clear reversal signal. There was a doji, then a bullish engulfing candle, followed by a big red candle at which point I shorted the shares at the end of the day.
Of course, mistakes are so clearly seen in hindsight. And if the stock had continued on a downtrend like I thought it would, I’d assume I read the reversal signal correctly.
So what’s the takeaway? I’m going to look for clear reversal signals on my next trade.