On Twitter @DownsideHedge we tweet all the trade signals generated by our Twitter sentiment indicator for individual stocks. We tweet long signals, when a long position is closed, short signals, and when the short is closed. In addition, we also mention any consolidation warnings and when they’re cleared as well as counter trend bounce signals and their corresponding signal that the down trend is likely resuming. For official tracking purposes we use the closing price of the day we get a signal. However, in real life we don’t rigidly follow the signals. As we’ve mentioned many times before you must use your own judgement and not blindly follow the trade signals…ours or anyone else.
Today we had an example of a signal that closed a long position on Citigroup (C). However, in real life we wouldn’t sell our stock simply based on the Twitter indicator. When we posted the signal we tweeted that we’d give the trade more room. Please note the market and Citigroup were pretty close to being flat on the day at the time of the tweet.
The reason we would give the trade time to play out is that real life trading requires a bit of nuance rather than rigid application of a fixed set of rules. To give you an idea of what we mean we’ll use Citigroup as an example.
From a very simple technical analysis point of view the stock was just above its 50 day moving average and the trend line created from the July lows and the dip we bought. For the past year the stock has respected the 50 dma so we felt there was a good chance it would hold above it and the trend line support at the same level. But there is some nuance to this pull back. A few days ago the stock gapped down on a report that it may face big losses if the US dollar rises. That news damaged the stock after the announcement, but the next day didn’t bring a lot of continued selling. The stock held up fairly well (until the market as a whole fell late in the day) telling us that we shouldn’t be so quick to jettison the position.
Next, our Twitter sentiment indicator was mostly following price down rather than showing a huge negative divergence. The move lower in sentiment was coming from extremely high levels and didn’t take our indicator below zero. This tells us there was a good chance that some profit taking was occurring, but there were still more people positive on the stock than negative. A sign that the bad news wasn’t severely impacting traders on Twitter, which is another sign that the 50 dma might hold.
Finally the S&P 500 Index (SPX) is at a support level calculated by several different methods. That made us think that there is a high probability the market would bounce taking Citigroup with it. If the market couldn’t hold 1600 then we felt that Citigroup would get pulled below its 50 dma and we’d close the trade.
From a risk reward perspective we felt that we’d be risking 3 or 4 percentage points against a possible 12% to 15% rally. Not bad odds. When we put it all together we figured that we should wait another day or two before making a decision.
For the sake of this example let’s pretend that the stock was far extended above its 50 dma and that our Twitter sentiment indicator had been diverging from price and finally broke below the uptrend in sentiment. This would have told us to move our stop levels up fairly close to the current price (at the very least) and close the position if the stock started to show weakness.
You can see that two signals that suggest a trade should be closed would be treated differently based on what’s happening with the stock (and the general market). The moral of the story is that not all Twitter trade signals are created equal so please use your best judgement rather than simply trading each and every signal blindly.