How Do You Buy a Rally Late?

Stock and ETF Timing Strategies

ETF Timing Strategies: Buying Late

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So what do you do if you buy late and you missed the first ETF timing entry point?

If you enter a rally early you have the risk that your buy point will FAIL as support leaving you with a loss.  If you buy close to that support level, you can often minimize your loss.

Buying late when ETF timing can be an issue too.  If you are looking for a good investment or trade, generally you need a Reward: Risk ratio of OVER 2:1.  That means even with a gap lower the day after you buy in, your loss should not be more than half of your expected gain if the rally reaches your target.

This means that if you buy half way into a rally to your expected target, which for this rally (9-2010) would reasonably be the June and August highs for example, your Reward: Risk may be 1.0 or less and NOT the 2:1 minimum we want as a set-up.  Not good enough, if you place your stop loss point at the prior low. 

For the S&P 500 (SPX) the numbers are:

August intraday high: 1129.24
August intraday low: 1039.70
Close on 9-3-2010: 1104.51
GAIN LEFT to Aug high: 24.73
LOSS to Aug. low: 64.81

REWARD: RISK = 0.38 WHICH IS MUCH less than the 2:1 REWARD: RISK we need.

So now what?  We need to find a trade that will give us a 2:1 REWARD: RISK ratio by:

1. Picking an ETF or stock that has MORE rally potential from the current level that the SPX.

2. An ETF or stock that also HAS rallied from the bottom.  You don't want to pick an ETF or stock that has played dead since a significant low was made by the overall market.

For example?

The semiconductor index (for which there are ETF's) is one.

What is the set-up for the SOX, the Philadelphia Semiconductor Index?

Breakout point: Was the close above the prior low of 323.64 on 7-1-2010.
Target: 8-4-2010 high of 354.91, because that could be conservative.
REWARD: 26.02
RISK:5.07

REWARD:RISK = 5.17 (far above 2:1)

We FINALLY have a POTENTIAL WINNER!

Please make YOUR OWN decision on this trade.  It is given as an example of what to look for across the map of stocks and ETF's.  You can assess the merits of this trade yourself and whether the fundamentals would support such a run, but the point is that THIS IS A TRADE with potential that can be further investigated, while buying the S&P 500 right here may not be such a great set-up if you are "buying late." (unless you somehow are able to find a closer exit point, thereby reducing your risk)

CONCLUSION: If you are buying late, be careful about your REWARD: RISK ratio  on the trade.

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