Well that was quick. The NASDAQ has completely broken the trend line we've been referencing for the last couple of days. It appears extreme volatility has returned to the markets. The big question now is, was the recent top following the Fed's historical announcement the top for the year, or is there still more upside left in stocks. We're going to have a serious look this today, as well as answer some important questions we received from a few members over the last couple of days. Advertisement What trades should you set-up for tomorrow? - Free Daily Market Analysis & Commentary This free service will deliver our popular morning and evening analysis reports directly to your inbox. Over 100K traders are using this analysis to prepare and plan for the next trading day, while getting a jump on changing market conditions for stocks, futures, ETFs, commodities and foreign exchange. Start receiving your analysis and commentary now! Advertisement We mentioned yesterday if the NASDAQ convincingly broke its trend line, which has been intact ever since late July, the next logical support level would be a 3/8 retracement of the whole move. Although we most definitely didn't think it would happen this quickly, we're only 32 points away from that number as I type. The last two days have been about as wicked a selloff as we've seen since the middle of the summer. The behavior of the major indexes have taken on that same behavior, but we've yet to see if they can recover like they did throughout the summer following sharp moves down like we're seeing today. I've included a weekly chart of the NASDAQ Composite here showing you this pullback has and will continue to be very logical. Notice the COMP has basically gravitated back to the 3X3 DMA (blue line) on this weekly chart? This suggests that although yesterday and today's move lower will likely freak many investors out, it hasn't jeopardized the long-term landscape of the markets just yet. You've probably heard us say before when stocks or an index is thrusting, the best time to step back in is when the stock or index in question moves back toward the 3X3 DMA. More often than not, once the stock or index comes back to that displaced moving average, it will resume its uptrend with three bars, which in this case would be three weeks. With that being said, there's a strong chance this market is consolidating and shaking out the weak hands in an effort to stage another leg up come October. A full 3/8 retracement on the COMP from the June low to the September high would put the COMP right around 3023, which would represent the perfect entry if this market is going to move higher going into the elections. If the COMP can't hold that 3017 level, this market could be in for a mini disaster. However, my analysis tells me that's not going to happen. Should the weekly and monthly chart bars start getting extremely long in the tooth going forward, that will be a concern, however, that remains to be seen. While the media continues to freak investors out, I'd get ready to add to or open new positions to the long side if and when the COMP approaches 3017 - 3059. There's a strong confluence area there, which should support stocks going forward. Again, we'll reiterate, you've got to continue to be opportunistic in this market. If you're not, gains can turn into losses fairly quickly unless you're way in the money in positions you have open. If that's the case and you're into your ideas for the long haul, I wouldn't let the recent weakness concern you. Just our two cents. Setting Stops and Trailing Stops Now is probably a good time to follow up yesterday's edition and answer a few questions from one of our members who asked... How do I know where to place a stop loss? Is there a % level below your buy price? How far below do you keep your trailing stop? I have noticed that when you recommend a stock, rarely do you say where to put the stop loss? The above question are based on holding stocks for the short-term. All good questions. First, we usually don't suggest actual stop loss percentages or price points, as well as suggesting actual trailing stop loss price points, so you would be correct. The reason is everyone's financial situation is very different. And, when I say different, I mean different. Everyone's risk tolerance is also very different depending on how important or un-important the amount of money they have in an idea is to them. What I mean is if you're young, you can be much more aggressive, but if you're older, you've got to be much more conservative. Additionally, everyone's time frames are also very different. However, when it comes to longer-term holdings, stop losses and trailing stops should be given more breathing room. Even then though, the type of holding makes a huge difference. How speculative is the idea? If it's very speculative, a tighter stop might be more prudent. If it's a very conservative idea like a Microsoft (MSFT) or something, you're stop loss or trailing stop could be much lower. Conversely, with short-term time frames, stops and trailing stops should likely be a little tighter. Then, are we talking about owning a stock or are we talking about options? If I'm in an options trade, to set a 10% or even 20% stop isn't out to lunch, since options can be extremely volatile. However, if it's a stock, 20% would be way to aggressive for me. As a general rule of thumb, short-term stops of 5% aren't a bad idea. As for short-term trailing stops, most of setting the trailing stop has to do with how much the stock has ran from my initial entry point. If I'm up 20% in an idea, I might set a stop loss at just under 5% from its 20% high, and from there let it go as high as it wants while continuing to move my trailing stop just 5% below whatever it's at. If you're looking for something you can apply to all ideas without considering what I've said above, 5%-10% are decent numbers to work with for stop losses or trailing stops. If you end up getting stopped out, you can always reassess where you're at with an idea and jump back in at any point you see fit. It's important to remember, we're a starting point for ideas, not a total solution. Will Sprint Continue Sprinting? Speaking of ideas, we had another member asking us about Sprint's recent parabolic run-up. He asked us... are you still accumulating at this price? What's your strategy at present? It's had quite a run up, but I'm reading info that puts it in the $15.00 range next December. First, when he said next December, I'm assuming he meant December of 2013. Here's our thoughts on Sprint on more of a long-term basis. No, I would not be adding to positions just yet. Once the stock hits the $6.50 range, I would imagine that's going to be a fairly strong resistance level. You may even want to take profits there and wait until the stock pulls back for a re-entry. Once it pulls back and gathers enough steam, the next logical stop from there would be around $9.80, which I would again take profits at that level in anticipation of another decent pull back. From there, $15 would be the third leg up, but that's quite a ways off. We'll have to see from a valuation perspective where the landscape of the space and Sprint's fundamentals are at that point. It's also important to remember the landscape of the whole market and corporate earnings in general across the board will also affect the price of Sprint going forward. Stocks typically are not an isolated game. Sentiment and general corporate earning's trends play a big part. Anyone who suggests Sprint will be worth $15 per share by December of next year is blowing smoke at this point. There's no possible way anyone could justify that target price based on the company's recent growth and current fundamentals. Hope that helps. Yes, Gold is Still the Preferred Currency, But... Lastly, before we let you go today. One reader asked us if our golden rules yesterday had anything to do with gold or silver. The short answer is no. However, since we're on the subject of gold and silver, we made it pretty clear for a while now that precious metals may have seen their best days for quite some time and so far, we've been spot on. Gold is at a very logical resistance level right now and I would be exiting all precious metals around current levels. In the event gold starts gravitating back to its highs, then and only then, would I consider re-entering precious metals. My own two cents is our economy, as well as the rest of the world's economies would have to go into a real downward spiral to suggest precious metals are going higher. You have to remember, much of the appreciation of precious metals had a lot to do with weak currencies among other things. You might say to yourself, well isn't that the case still? Yes, but have you considered much of the currency weakness and doom and gloom may have already been speculatively priced into those commodities. Just a thought for you to consider as you decide what to do with your positions. Have a great afternoon, see you tomorrow.