April 2, 2017 – Stock Option Coach Newsletter
The month of March was all about the consolidation of gains from the big move we had in January and February. The Nasdaq keeps finding resistance at 5,925 while the Dow and SP-500 declined about 3% each. This is within the range of a normal correction of 3-5%. All three found support last Monday around the 50 dma, a place we talk about often. This is known as the “Wall St. watering hole,” where the institutions go to get a cold one. Or in trading terms, they tend to buy as a group many times at this moving average. Powerful information if you know how to use it. All three averages had big reversal days and created one of my favorite plays, a gap buy. Intraday gaps fill way more often than not, and the odds can be played.
All this translates to a normal “buy the dip” type correction, and that is what happened on Monday of last week. Last week we discussed the fact that the bull market is still intact due to historically low interest rates and companies that are still having good earnings. And the QQQ’s for example ripped up 4 out of 5 days last week. So if you subscribe to this newsletter, you had a big advantage. Here is what we said last Sunday: “My long term “Herd” and my short term “Herd” are both on a buy, and while the market was weak Friday, it did finish with some buying. The odds do favor higher next week, but I’m being cautious until I see the institutions start buying in earnest again. And if Monday or Tuesday drops again, watch for a reversal to show us that the big buyers are buying the dip once again.”
Well, the buying did come in,and it did it on Monday as we discussed it could. It’s not often I can be this specific and get it right, as I make no predictions. I can only state the odds and use my 38 years of experience. But playing the odds and probabilities, rather than listening to the news, can translate to big profits. The bearish media and social media types are still playing the same old fear based song. The same one they have been playing since 2015 and really for the last 100 years. They will play it to anyone who will listen. I won’t. I will just take the odds trade any day and focus on making money.
My long term “Herd” and my short term “Herd” are both on a neutral reading, which usually translates to more consolidation, but don’t rule out another leg up starting this week. And this environment usually favors day trading over swing trading. But as always, if the big buyers step in, I will follow their lead. And the same goes if they decide to unload. April is historically the best month, so I will be watching closely for the next big leg up. A break out of the pennant that the SP-500 has formed would be nice to see, and could be the start of some real buying again.
As the QQQ’s chart below shows, the Nasdaq continues to be the strongest of the 3 averages. The current resistance may stall this advance, but watch closely if we get another 1 or 2 down days as this could just be the last of the consolidation move. Any time this week or next that the institutions buy and send prices skyrocketing again, you have to go with the trend and follow their lead. Last Monday was a great example of that. Bears that feed on the news & predictions got scalped! And one other important consideration of how healthy this market is, and how soon it could move up again, is to take a look at what leading, glamour stocks did in March. My favorite swing stock, Amazon, lit the after burners last week with 5 solid up days. The last 3 runs have been $90 in January, $60 in Feb, and $60 last week. It doesn’t get much better than this for option traders. This a textbook move that I teach, and SOC members also have a proprietary indicator to help spot where this run begins.
Chipotle – CMG also launched, gaining roughly $42 over the 5 day run.
Let’s also take a look at the weekly chart to gain a better perspective. You will always get better information by going to a larger time frame, and the infomation below can be applied to any stock. For those of you not trained at SOC, the 40 week moving average is a place where institutional buyers are trained to either buy a position, or add-on to a position. Review other charts to prove this to yourself. This is repeatable information that can be used to generate profits. Tesla – TSLA has resisted any selling so far, and the declining volume pattern says that there is more upside to come. Watch this stock closely this week to see if we start another leg up.
Netflix – NFLX had a huge run last week as it launched off the 50 dma. If you just learn this one thing from our SOC Newsletter, you can use it over an over again to generate profits as I have. One of the biggest problem I see with struggling traders is they forget to focus on whats repeatable in the markets. They are always on the hunt for the “Holy Grail” or the next stock that everyone is talking about. They scan thousands of stocks and chase the “hot” stocks that are profiled in the media. And in 38 years, I don’t know a soul who has been successful in trading with that strategy. Patience and discipline in using repeatable indicators and pattern recognition while tracking a small number of stocks is the foundation for success in my opinion. (Don’t forget the risk strategy!)
Apple – AAPL found buying off the 21 dma last Monday and has shown us the institutions have found their appetite for this stock again. Say what you want about lack of new innovative products, they are still one of the biggest corp’s in the world and have about $200 Bil in cash. They can hire the talent for more new innovation and fund it! March was mostly a sideways consolidation move and the buying could resume this week.
Facebook – FB also saw the instit’s jump back on board at the 21 dma, and if it pulls back to the 10 dma, watch for more buying to come in.
Nvidia – NVDA has been in a sideways box pattern and watch for a break above the $110 area to attract buying as well as scalping of the bears who will short anything. Notice the support at the 50 dma.
Rocket Fuel – FUEL has the look of a stock that is slowly being accumulated by hedge funds or a big investor and the lack of selling is obvious. It has run up almost 70% in a month. Rocket Fuel is a company that primarily employs AI to intelligently distribute ad space to bidders to maximize advertising profits. While sales and earnings have not been impressive, I always defer to the price on the chart vs fundamental (funny mentals) information. And as long as you honor your stops, this stock could have big potential.
Let’s review the 25 Market Insights from the great trader Jesse Livermore:
(We are taking them two at a time)
7. Successful trading is always an emotional battle for the speculator, not an intelligent battle.
8. I believe that the public wants to be led, to be instructed, to be told what to do. They want reassurance. They will always move en masse, a mob, a herd, a group, because people want the safety of human company. They are afraid to stand alone because they want to be safely included within the herd, not to be the lone calf standing on the desolate, dangerous, wolf-patrolled prairie of contrary opinion.
One of the biggest things I learned when I started trading full time is that I would have to be OK with trading contrary to all the news and opinions out there. And as I continued to notice that were wrong most of the time, it became an easy habit to just ignore them. Turn it off and follow the odds and probabilities. Use indicators and pattern recognition if you have them. If you don’t, go find them. If we could get wealthy watching CNBC or surfing the net, wouldn’t we all be looking for our next G5 or yacht?
Here is an article by Steve Burns, a teacher I respect, that reinforces what I harp on to all my students. It is simply that you MUST get out of a losing trade quickly. And where is that exit point? Simple again. Just get out before you have a 1% loss of your total account. That is the maximum acceptable loss on any one trade. If you don’t agree with Steve or myself, read the Market Wizard interviews with the greatest traders of our times.
Risk Management for the Trader in 1 Lesson
June 21, 2012 by Steve Burns
The very first rule we live by is: Never risk more than 1% of total equity on any trade. -Larry Hite (Market Wizard)
I try very hard not to risk more than 1% of my portfolio on a single trade. –Bruce Kovnar, (Market Wizard)
One of the most simple lessons that a trader must follow to ensure his long term success is to never risk more than 1% of his trading account on any one trade. This does not mean trading with 1% of your account capital it means adjusting your stops and position sizes based on the volatility of your stock, currency, commodity, option, or future contract so that when you are wrong the consequences are the loss of 1% of your trading capital. This not only eliminates your risk of ruin for a string of losing trades but also lowers the volume of your emotions and stress hormones so that you can think and trade with a clear mind and not have your ego step into a losing trade and hold it due to huge losses that you are unable to take due to the perceived consequences of the loss.
If you do not understand the reality of having 10 to 20 losing trades in a row or one huge unexpected event that causes a loss then you have not been trading long enough to experience a volatile market or an unexpected event that shakes a stock, commodity, or currency or an entire market. The #1 job of a trader is not to make money but to protect what they already have and your capital is protected best through risk management.
Your trade entries should be designed at a price level and a position size so that if after you enter it retraces and you are down 1% of your trading capital then you should know at that point that you were wrong and need to exit.
The opposite of the 1% rule as a stop loss is that your win size is unlimited, you will let your winner run until it reverses through a trailing stop at a price level that shows you that you should exit and lock in profits because near term support was lost. Your losses should almost never be more than 1% of trading capital but your wins can be 2%, 5%, 10% or even bigger when you enter at the price sweet spot and a trend takes off.
Small losses and big wins are the secret of winning traders.
In closing, I want to say that a great attitude and persistence may be the greatest assets a trader can have. I don’t know any successful traders or businessmen who are without these qualities. Oh, and here’s some medical advice (No, I’m sure not qualified, but this has worked for me for a long time) 🙂
The Six best doctors in the world:
5. Self Confidence
All the best,