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Black Monday an Example of Why You Need Exit Strategy Before Entering

The Nasdaq 100 is weaker, but is it weak enough to get out right now?

Today we’re going to take a look at the technology stocks and specifically the Nasdaq 100. The past week has seen poor results from Facebook (FB) and weakness in Amazon (AMZN), Twitter (TWTR), and other tech leaders, writes Mike Turner.

The Nasdaq 100 (NDX) is weaker, but is it weak enough to get out right now?

Last week, I showed you the current Market-Directional chart for the S&P 500 (using the ETF SPY as the proxy for the S&P 500).If you missed it or want to read it again, you can click here.

Remember, Market-Directional Investing (MDI) is powerful because instead of trying to guess where the market will be going, we measure where the market is right now. Even though the noise in the markets can be deafening, I ignore that noise and focus only on the signals.

And the chart for PowerShares QQQ Trust (QQQ) the ETF for the Nasdaq 100, remains strong.

chart 1

QQQ is trading above the yellow transition zone.I set the current stop for QQQ at one “Expected Move” (EM) below Friday’s close. The EM is derived from the Black-Scholes formula and measures the normal weekly volatility of any stock. The current EM on QQQ is $6.62. That puts the stop for QQQ at $170.94.

I get a lot of questions about how my system would have performed during seminal market events such as occurred on Black Monday on October 19, 1987. That’s when the Dow (DJI) lost more than 22% of its value in one day.

Several of my clients asked me to run my model just prior to Black Monday. After all, a drop of more than 22% in one day is the type of event that can cost years of hard-earned returns.

And it happened so quickly. As curious as I was about the test, I have to admit that I was nervous. After all, Market-Directional Investing is based on trends; when they start and when they end. But, in all cases a trend has to be established first. Could my Market-Directional Investing model actually provide enough warning to avoid Black Monday?

So… I ran the test.

The results were better than I could have imagined. We tend to remember the “big events” in the markets, but not the details. As you can see, below, the market started moving lower a few weeks before Black Monday. It topped in August 1987 and began moving lower.

chart 2

The result? My Market-Directional Investing model triggered a go-to-cash signal (Stop Loss) on the Wednesday before Black Monday!

Black Monday is an example of why you should always have an exit strategy in place before you enter into any trade. This is one of the keys to be a successful investor. No guessing, not when entering a trade and not when exiting a trade.

The MoneyShow San Francisco is coming up in just a few short weeks and the MoneyShow Dallas just a little more than a month after that.I’d like to meet you and talk investment strategies with you.Here’s more information about these important events.

Stop guessing and start measuring,

If you’re interested in learning more about how I manage money using the Market-Directional Investing methodology, you can read more here.

This article was originally published by Founded in 1981, MoneyShow is a privately held financial media company headquartered in Sarasota, Florida. As a global network of investing and trading education, MoneyShow presents an extensive agenda of live and online events that attract over 75,000 investors, traders and financial advisors around the world.

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