Sell Signal Aftermath in Whirlpool WHR

Jul 22, 2009: 12:35 PM CST

On Monday evening, I highlighted a reader’s question on Whirlpool (WHR) in the post “Doji Sell Example in Whirlpool.”  The question was “I got short off a doji but price kept rising – what happened?”  Please see the prior post for the answer and my analysis.

My main point was that you shouldn’t take signals in isolation and that the ‘doji sell signal’ was valid as long as price did not rise too far above the recent high.

On Wednesday, we’re seeing the sudden and powerful decline that the sell-signal predicted, giving us an example of real-time analysis of trading tactics playing out for us to see.  Let’s look at the “aftermath” of the doji sell signal and learn a few lessons in trade management.

Monday’s “gravestone doji” (red candle) was part of a ‘sell signal’ that also included price being outside the upper Bollinger Band as well as coming into prior support (which often turns into resistance) on the weekly chart (from July 2008).

One could have gotten short at the end of Friday’s trading when the doji was near completion somewhere around $53.00 and placed a stop above the $56.50 high… and would have been forced to endure ‘heat’ (price going against your entry) but not triggering your stop.

In this case – like many others – if you micro-manage your position and think “Well, price is going higher against me – I’m going to be stopped out so what’s the point of waiting to be stopped out?  I’ll exit early” then you would have exited in advance of today’s 10% plunge and lost money, despite the fact that price behaved as you expected it to do (retrace down).

Yes, price rose to ‘challenge’ your stop (which I wrote should be placed not a penny above the high, but a comfortable distance depending on your risk tolerance), but price fell according to the general sell signal.  On Tuesday’s trading, we actually formed a “Hanging Man” bearish candle at the highs.

So, we had a doji on Friday, Hanging Man on Tuesday, “Top of the Bollingers” trade, resistance at the $55 level (polarity principle), overbought oscillators, a lengthy singular swing (that appeared to be overextended), and I’m sure you can find other technical factors to consider.

Remember that trading is not easy and price is not going to head in your preferred direction just because you entered – you’ll rarely if ever enter at the absolute high and that should never be your goal.

Your goal should be to identify the likely ‘next swing’ in price using non-correlated methods and price structure, and then identify a target to play for that is likely for price to hit and then locate a stop-loss where price is NOT likely to go, or would invalidate your hypothesis (In some ways, trading is like hypothesis formation and testing).

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

2 Comments

2 Responses to “Sell Signal Aftermath in Whirlpool WHR”

  1. reggieperrin Says:

    Perfect example of how 'imperfect' trading can be !

    Any aggressively contrarian trade does require patience before it follows through.
    In this case it had to be held overnight 3 times with the risk of an overnight gap against you.

  2. reggieperrin Says:

    Perfect example of how 'imperfect' trading can be !

    Any aggressively contrarian trade does require patience before it follows through.
    In this case it had to be held overnight 3 times with the risk of an overnight gap against you.