It’s been a good run, but the sun has set on our model trade. As my family and I are out in the hill country of western Puerto Rico housesitting and taking care of our friend’s animals we received an 821x sell signal in NTG today. Even though it appears to be oversold in the short term, I recommend selling AT LEAST half to lock in our hard fought 6% gain, which includes the fat dividend we received in August. If you decide to hold half, I would sell it if NTG closes even one penny below yesterday’s low of $19.03.
As far as the market as a whole, it’s at a crossroads right now. The violent pullback of the last few days could be nothing more than a healthy retest of the breakout zone before the next leg higher. On the other hand, we might be witnessing the beginnings of a failed breakout which could lead to a fast move lower. Let’s continue to monitor price action for clues and stay flexible. In the meantime, the proper course of action is to honor the sell signals in your individual holdings to both lock in profits/limit losses and raise cash.
After I get situated back at my place later this month, I will make a video with a new official model trade. For now, I have a handful of 821x trade ideas that I hope you find helpful. Have a good week!
SUPN – buy with a limit price of $22.51
ADS – buy with a limit price of $213.21
XBI – buy with a limit price of $63.54 (biotech ETF)
Inverse ETFs: (I would NOT get aggressive with these)
EFZ – buy with a limit price of $32.36 (short European stocks)
SH – buy with a limit price of $38.86 (short the S&P 500)
Remember, I only track one 821x model trade at a time for educational purposes. IT NEVER MAKES SENSE TO PUT YOUR WHOLE ACCOUNT INTO A SINGLE TRADE. Please refer to the section on position sizing in the 821x Trading Manual.
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After a year long consolidation, the market has broken out to new highs. As I’ve mentioned before, we have to take seriously the possibility that the post Brexit shakeout ushered in a new bull market (or a resumption of the bull market that started in 2009 depending on how you look at it). A bumpy ride higher, north of 2,400 in the S&P 5000, seems quite reasonable.
So how do we ride this potential bull? Sure we can buy an ETF that tracks the S&P 500 like SPY, but that would only yield average results. To generate alpha we need to actively put together and manage a basket of above average stocks that will outperform passive index funds.
One of the most common questions I get is, “What stocks should I buy?” Well, no matter how much I believe in a company I would NEVER put a blanket buy recommendation on ANY stock. I only want to buy a stock when it looks like it’s ready for an IMMEDIATE move higher and there is a stop loss level close by to limit risk. I call the system I use help me identify these optimal entry points 821x.
When I want to add a new position to my portfolio, I scan HUNDREDS of charts looking for 821x buy signals and only enter the very best looking setups. Some of the watchlists I scan through are from paid services and others I have built myself. However, I am going to share with you two of my favorite watchlists that are completely FREE. Both of these lists are focused on companies that are expected to experience above average earnings growth, which is a great place to put our money in a bull market environment.
IBD 50 – you have to subscribe to Investors Business Daily to gain access to the most up-to-date IBD 50, however, you can get a decent idea of what’s on the list for free by checking the holdings of the FFTY ETF.
Riding these stocks is actually a lot like riding a real bull. You are likely to take plenty of bumps and bruises along the way when a trade doesn’t play out the way you hoped it would. You’ll also likely experience the frustration of getting “bucked off” a big winner before it makes it’s run like we did in OMN and we almost did in NTG. If it was easy, then everyone would be doing it. However, if you do your homework and follow your trading system, you’ll come out of this bull run with a lot more money than you had beforehand.
The S&P 500 closed at a new all-time high yesterday. Upon hearing that, the average investor’s first instinct is to think that the market is topping out. Stocks are too expensive. Valuations are dangerously stretched. The higher they fly, the harder they fall. We are overdue for a crash etc., etc..
However, we here at DIY Investor know better. Perma-bear fearmongering is as unhelpful as unchecked bullish exuberance is dangerous. Emotions and feelings aside, here are the facts: after making it’s FIRST new intraday high in over a year on July 11th, the S&P 500 made 8 additional new highs and there is no reason to think that there aren’t several more on the way. Only ONE of these new highs will be a long-term top. MOST of them are just stepping stones to higher and higher prices. That’s why, counterintuitively, new highs are bullish.
If this rally continues, fears of a failed breakout will give way to a fear of missing out. IF this happens, the market can enter a mania phase where the uptrend gains EVEN MORE momentum. IF the last remnants of fear give way to unbridled greed, the market can explode into full-on bubble territory, which would mean we would see MUCH higher prices than we are seeing now. When this hypothetical bubble inevitably bursts, it will end badly for those that are unprepared. However, those of us with a plan will do very well and be able to lock in the lion’s share of our increased wealth.
Before you accuse me of smoking something, let me just say that I fully understand that this is a far-fetched potential scenario. Nevertheless, I do believe it is one worth keeping in the back of our minds as we break out of a year consolidation to new highs.
P. S., I only provide the actual buy and sell instructions for our 821x model trade here on the blog and through email to subscribers. Be sure to follow me on Twitter @marketchameleon for updates in between. On Tuesday, we received an 821x sell signal on NTG, our model trade. However, I recommended via Twitter that we not close the position unless it closed below $18.10. The stock pivoted and proceeded to put in an 821x buy signal on Thursday so far averting an unnecessary shakeout!
— David White (@marketchameleon) August 3, 2016
The 821x system is a trend following system. However, it’s not enough to know the direction of the trend for a trade idea. We also have to stay in touch with the direction of the market as a whole. We always want to have the wind at our back. This is even more important in a down trending market where even “good” stocks gets dragged down with the “bad”. Very few stocks make it through a bear market unscathed.
So what is the evidence that the market is currently in a primary downtrend? First off, the S&P 500 is below a DECLINING 200 day moving average. Furthermore, the definition of a downtrend is lower highs and lower lows. The market just made a pronounced lower high and lower low that is visible even on a monthly chart.
By the end of the first week of trading in 2016, my retirement account was almost completely in cash as my remaining positions flashed 821x sell signals one by one. By the middle of the following week, my IRA was completely in cash as our model 821x trade at the time triggered a sell. There is no absolutely no sign of an end to the current down trend. It may take MONTHS for the market to heal and the primary trend to reverse. I am thankful that the 821x system has moved my money out of harms way.
Many beginner DIY Investors feel like they have to stay fully invested all the time because “their cash isn’t growing if it’s on the sidelines”. It’s important to remember however, that when stocks go down, the value of your cash is actually increasing in that you can buy more and more shares. In fact, market declines are what set up some of the biggest and fastest gains as the downtrend comes to an end and the market reverses back up, refreshed.
When looked at this way, one starts to understand that maybe we should embrace a bear market. This is obviously much easier to do when most of your money is safely in cash.
Before I finish, it’s important that I ask and that you answer the following questions honestly:
Unless you can confidently answer yes to both questions, you absolutely should NOT put your retirement accounts in cash.
If you are on this site, I generally assume that you are a do-it-yourself investor or at least an aspiring DIY investor. You are someone who wants to take an active role in growing your investment accounts by executing smart, higher probability trades.
However, when the market starts tanking, average investors start freaking out and do stupid things that hurt them in the long run. Just in case any of these people have stumbled in, I want to make clear that average investors SHOULD NOT be flipping their long term retirement accounts into and out of cash. They will likely miss the resumption of a bull market which would put their long term financial goals at risk. Know thyself.
You’ve worked hard to build up your savings account. There’s no reason why you can’t put that capital to work for you. The stock market is an incredibly powerful and convenient tool that allows you to do just that.
But how do you actually go about using this tool to grow your savings?
The Standard Advice
Personally, I’m not willing to settle for mediocre returns from an expensive money manager. I’m also not interested in patiently waiting for my account to recover from a market crash. Been there, done that. No thanks. There is another way.
It really is that simple. So why don’t more people do it? There are a lot of reasons, but for now, let me just address the two excuses I hear most often.
Excuse 1: “It’s too hard”
Repeating this statement is like holding up a white flag. I mean sure, you have to apply yourself and do some work. You do have to learn about managing risk and your emotions. It shouldn’t be a surprise that something worthwhile will take some effort.
But let’s be honest: this isn’t brain surgery. Hell, I can do it! My background is computers and music, not Wall Street. Seven years ago I didn’t know the first thing about stocks. If I can figure this out, there’s no reason why you can’t as well.
Learn the rules of a trend following system like the 821x and then study charts. See how a big winner looks at it’s buy point and vice-versa for big losers. It’s not hard, it just takes practice and repetition to identify the best setups.
Excuse 2: “I don’t have time”
Do you have time to watch TV? Do you have time to play video games? Do you have time to surf the web? I could go on but I won’t. Just answer the following questions and be completely honest with yourself.
Is it worth investing the time it takes to develop a valuable skill that will ultimately lead to increased personal freedom?
Is the short-term sacrifice worth the long-term benefit?
If your actions are not congruent with your answers, perhaps you need to spend some more time on this to figure out the truth. For example, if you continually engorge on junk food, one would have to seriously question the veracity of any claim you make about wanting to lose weight.
Another thing to keep in mind is that the first step is always the hardest and most time intensive. Once you get past the learning curve of a system like 821x, it really should only take a few minutes a night to look through charts and enter orders if any. The cost in time spent is miniscule in comparison to the potential benefits.
So get busy. Don’t be afraid to make some mistakes. Lose the excuses. You can do it!