It's not just a tough day to be a trader. It's a tough day to be an American. I'm referring to the sadness with which most folks wake on the anniversary of the Sept. 11, 2001 terrorist attacks. It's a weight and, for some, it's much heavier than it is for others. Today is one of those trading days when it is very nice to have a group of other traders with which to chat throughout the day. It helps to take the time to share stories, and to keep smiles on the faces of friends -- and to avoid making any trades based on emotion.
This morning, Bob Byrne and I were talking about some solar names. He had a slight affinity toward First Solar (FSLR) through the $72 level, and I countered by saying I preferred JinkoSolar (JKS) at current levels, above $33.55. Bob then said he didn't like the risk level on JinkoSolar, because he felt you had to allow it to fall to around $30.50 before you'd know whether you were wrong. While I think $32 is the more accurate level as far as that's concerned, I can absolutely see his point. For First Solar, you know you're wrong if the stock goes under $70, or even under $70.50 on a closing basis. There isn't a $30.50 vs. $32 debate.
So, in looking at this JinkoSolar chart, I can point to the strong money flow index (MFI) and price momentum oscillator (PMO), along with potential price breakout -- but it is hard to get past Bob's argument without having a second thought on the trade. If you have a second thought, then you'd better have an alternative answer.
My answer is the Guggenheim Solar ETF (TAN), but not for an alternative trade to JinkoSolar. I would still prefer to be long JinkoSolar if the price triggers, but I will use the chart of TAN for my stop.
TAN's price pattern is strong, but MFI isn't quite as strong as it is for JinkoSolar -- and TAN is not quite as close to a breakout as is JinkoSolar. However, TAN is like First Solar in that it is closer to support. If it closed under $44 and triggered, I would absolutely exit my JinkoSolar long. In fact, I would look to $44.50 as the stop trigger -- a level that's only about 1.25% below the current price.
One additional aspect to consider here is the correlation between TAN and JinkoSolar. Note that there is a correlation of nearly 0.90 on the 20-day moving average between these two. This is a highly significant correlation -- and it means that, if TAN loses support and begins to drop, JinkoSolar would be highly likely to do the same thing.
You can use this approach with more than just these two stocks. If you come upon a situation like I've described, simply take a look at some of the ETFs or securities that are highly correlated with the one you want to trade, and see if you can use them as better charts in service of risk management.