Saturday, April 18, 2015
4/18/15 Red House
The average investor in China has to be asking himself how he plans to navigate Monday's open.
My least successful trade on Friday is also the most instructive, at least when applied to the above scenario.
(a) Let's say the Shanghai Composite opens down -5% (as suggested by Friday's futures). Do you sell?
(b) Should the index fall further, let's say to -7%, will you have a stop level in place?
(c) Should the index then gap down hard to -9%, will you decide to capitulate, or will you add to your positions?
(d) Do you have the capital to add to positions? If not, do you plan to raise capital by cashing out? At what point will you cash out?
Let's replay Friday's action in RSX (Market Vectors Russia). Not unlike the Shanghai Composite, RSX had also risen (prior to Friday's selloff) about +20% since March.
(a) RSX gaps down -3.8% at the open. Do you sell?
(b) It continues to slide to -5.5%, which coincides with technical support levels. Do you stop out, or do you add to the position?
(c) A large sell order appears midday, taking RSX to the -8.7% level in the blink of an eye. Do you capitulate, or do you buy/add?
(d) Have you the capital to buy/add? Was it raised by cashing out @ -3.8%, to be deployed at lower levels?
All good questions for investors in the Shanghai Composite to ponder this weekend. Of course, it's unlikely that investors in the DJIA/SPX will need to ponder these questions immediately. Unlikely, but not out of the question.