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Archive for April, 2016

PRIM

821x sell: XLU / buy: PRIM

(watch video for market recap and trade details)

XLU – sell at market

PRIM – buy with a limit price of $23.43 (be aware that earnings are on 5/5/16

Other ideas:

IRIX –  buy with a limit price of $10.32
GLRE –  buy with a limit price of $21.69
GLD – buy with a limit price of $119.42
GFI – buy with a limit price of $4.16
GPRO – buy with a limit price of $13.56

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stare(crop)

patience pays

A dangerous misconception many DIY Investors have is that our job day-to-day is to “make money”.  Obviously, that is the outcome we are hoping to achieve, but it is not what we actually do.  Remember, we have no control over the direction of the market or of our holdings at any point in time.

No, our primary job is to manage risk.  Day in, day out this is what we  are actually doing.  The stock market can provide life changing monetary rewards, but with those rewards come enormous risks.  The only way to safely gain exposure to the rewards of trading is to strictly define and manage the risk you are taking.

There are two primary ways we do this:

  • Position size – I touched on this in my trading manual, but basically we NEVER want to go “all in” on any single trade.  We need diversification.
  • Stop-losses – This is the price at which we would admit that the trade setup is no longer valid and would therefore sell.  This level should be identified BEFORE we enter any trade.

Our position sizing tool combines these concepts.  I encourage you to play around with it so you can get a good handle on how much you are risking on any given trade.

There is, however, another often overlooked component of risk management that is perhaps even MORE important than the ones above: patience.

By this I mean having the discipline to allow marginal or higher risk trade ideas go without you while patiently waiting for the BEST, low risk, high probability setups.

Warren Buffett has a famous quote that’s relevant: “The stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch.

The fact is, every time we enter a trade we are putting our money at risk.  Therefore, we should always take a moment beforehand to ask ourselves, “is the perceived reward worth the risk?”  Be picky.  Be patient.  I promise you, it will pay off.

This concept comes to mind when looking at a chart of the S&P 500.  The market has just run 15% higher in about two months.  It’s just below a declining trend line that connects the closing highs from last July and November.

showing downtrend line connecting lower highs in SPY

right back up to the downtrend line connecting lower highs in SPY

If the current rate of ascent continues, we could be looking at new all-time highs in just a few weeks!  However, what is most likely to happen?  Personally, I think that after such a big run and at an important trend line, it’s more likely that the market will pull back in this area.  This doesn’t necessarily mean that we should get short.  The market doesn’t HAVE to pull back.  And if it does, keep in mind that it would actually be bullish for the market to put in a definitive higher low before breaking the macro pattern of lower highs and lower lows.

The bottom line is we have a short term bullish market still within a larger bearish look.  These mixed messages are about to come to a head so I believe the best course of action right now is patience.  It makes no sense to increase exposure to risk in the face of this uncertainty by taking big bets here.  Let’s continue to manage our open positions and patiently observe market action in this pivotal area.  There will be plenty of time to pounce when the outlook becomes clearer.

 

coverears(crop)

turn down the volume

In case you hadn’t noticed, the S&P 500 has had a MONSTER rally since February 11, rising over 14%.  Just since the beginning of March, the index has risen over 137 handles!

Knowing this, look at the headlines below:

Has any of the hand-wringing about the, at times, anemic volume of this rally been helpful?  ABSOLUTELY NOT!

I understand the disbelief.  When I calculated the potential measured move of the bullish “W” formation in the S&P 500 on March 5th, I was skeptical that it would actually be reached.  Yet here we are.

measured move hit! I also put arrows on the days the articles above were published

measured move hit!  I also put arrows on the days the articles above were published

Sure this rally is getting long in the tooth.  Sure the 200 day moving average is still declining.  But we make money when price remains above the 8 and 21 day (exponential) moving averages.  Before this rally comes to an end, we are going to AT LEAST need to see a close below the yellow line in the chart above.  Getting bearish before that happens makes no sense.  These simple principles apply to anything you are trading.

Volume is noise.  Tune it out and focus on what makes you money which is price.  Like Brian Shannon, one of my virtual mentors, is known for saying: Only Price Pays.  Profits made on low volume are just as valid as profits made on high volume.

So turn down the volume and listen closely to what the price action is telling you.