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picture of sunset in aguada, puerto rico

821x sell: LITE

If you followed the sell suggestion in my tweet on December 29th, you should be completely out of LITE now.  (BTW, because it’s more timely than a post, I’m planning to publish my sell suggestions solely on Twitter going forward, so be sure to follow me @marketchameleon.)

Although, the weekly chart still looks good, we trade using the daily time frame where the trade went against us.  The last thing we want to do is get stubborn and start rationalizing a reason to hold.  That said, you may want to keep an eye on it to see if it flashes a compelling 821x buy signal in the future.

daily candlestick chart of LITE

the big picture still looks good, but I don’t want to let a small paper cut turn into a gusher…

In the meantime, enjoy the festivities tonight and see you next year.  Happy New Year!

 

img_4317-1280x719

821x sell: NTG

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.

doesn't look good but it is outside the bollinger bands...

doesn’t look good but it is outside the bollinger bands…

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.

healthy retest or failed breakout?

healthy retest or failed breakout?

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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bigwinner2

breakdown of a big winner

Last week I closed out the last half of my biggest winner of the year.  Let’s take a closer look to see what lessons and tactics we can take from it and use going forward.

As I’ve mentioned before, I had a lot of success trading precious metals miners from 2008 to 2011 which, understandably, caused me to grow fond of them.  Unfortunately, this fondness had me “going back to the well” more often than was warranted, resulting in unnecessary losses.  The lesson here is to not become so enamored with a particular investment that you are ignoring or discounting the pitiful technicals.  In other words, don’t fall in love with something that can’t love you back unless you enjoy losing money!

Having gotten burned several times, I was initially skeptical of the rally when gold shot up at the beginning of the year.  Unfortunately, by the time it was apparent that this move was different and appeared to have legs, I didn’t see a safe way to get involved.  The key was to be patient and wait for a low risk buying opportunity.  The signal I was waiting for arrived on March 29th in the form of an 821x buy signal in GLD which I tweeted out.

821x buy signal

821x buy signal with obvious place for stop around $116

Seeing this, I went through my watchlist of miners looking for a good setup.  The one that looked best to me was Pretium Resources (PVG).

PVG consolidating around the 200dma

PVG consolidating around the 200dma

I entered a limit order for $5.30 a share which was the closing price on the day PVG first flashed an 821x buy signal, and got filled the next day.  After a week of consolidation, it broke out of it’s wedge formation and was up over 50% in little over a month!  Shortly thereafter, it had a sharp pullback to the 21 day ema where it put in a pivot with a low of $7.43.  When I saw that the pivot wasn’t going to hold a few days later, I sold half of my position at $7.33 locking in a nice gain of 38% on that piece.

sold half here with the pivot broken and the moving averages curling down

sold half here with the pivot broken and the moving averages curling down

A few days later, PVG gave an official 821x sell signal.  Having already locked in gains on half of the position, I felt comfortable giving it one more day to see if the closing low of $7.04 would hold.  If PVG had closed even one penny below that low I was prepared to close the rest of the position.  Fortunately, it held and proceeded to give an 821x buy signal a week later!  In hindsight, I can see that it would’ve made sense to go back to full size at this point.

PVG held $7.04 and the 50dma and then gave an 821x buy signal

PVG held $7.04 and the 50dma then gave buy signal number 2

The second move was even more explosive than the first, putting my remaining half position up well over 100% by mid July!  Then last week, it finally gave another 821x sell signal.

second 821x sell signal of this trade

second 821x sell signal of this trade

Again, because I had already locked in profits on half of the trade I felt comfortable giving it one more day to see if the closing low of $10.61 would hold.  Unfortunately, this time it didn’t, so I closed out the balance of my position at $9.71 for a gain of 83%.

all good things come to and end...

all good things must come to an end…

Putting the two halves together, I netted a gain of 61% on this trade making it my best trade of the year so far.  For reference and comparison, my biggest loser of the year was WYNN for a loss of only 6%.  Letting your winners run and cutting your losers short is the key to successfully growing your savings in the stock market.

I hope that reviewing this trade demonstrates one way the 821x trading system can be used in practice.  If you have any questions about this trade or the 821x trading system in general, don’t hesitate to ask!

mansplits2

stay flexible

“Turn that off, it’s time to go to sleep”, my wife said.  But I couldn’t pull my eyes away from my phone.  The market that had closed the regular trading session just shy of all time highs a few hours earlier, was now plummeting faster than I had ever witnessed before.  The “expert” consensus was wrong.  The majority of British voters wanted to leave the European Union.

The “Brexit” whipsaw underscores the importance of staying flexible.  A bearish macro pattern of lower highs and lower lows that had controlled the weekly chart of the S&P 500 for most of the last year was broken a couple of weeks before the Brexit voteBullish!  The post Brexit crash sliced through TWO potential higher lows AND the 200 day moving average.  Bearish!  The snapback rally that followed reclaimed ALL of the moving averages in just 3 days.  Bullish!  I don’t think I ever flipped my stance back and forth from bullish to bearish faster.

above the moving averages bullish, below bearish

Above the moving averages we are bullish.  Below them we are bearish or at least cautious

A few weeks on, with the S&P 500 now at all time highs, it’s easy to say that the Brexit whipsaw was just a bunch of noise that was best ignored.  Keep in mind though that one of these days we may see the beginnings of a REAL crash.  Never forget that complacency can quickly wipe out all of your hard earned gains and then some.

So where does the market have the potential to go now?  The S&P 500 has just carved out an ENORMOUS bullish “W” formation visible on the weekly chart.  As I mentioned before when discussing the two smaller W’s that make up the bottoms of this larger W formation, the potential measured move is calculated by adding the height of the W to it’s top.  I calculated a conservative height that ignores the “tails” of the weekly candlesticks as well as a more aggressive target which includes the full height to draw in the rectangular “measured move zone” in the chart below.

a monster "W" in the S&P 500

a monster “W” in the S&P 500

As you can see, a move to the potential measured move zone is good for better than 220 points or 10% over the next year!  As long as the S&P 500 continues making higher highs and higher lows above it’s moving averages we will maintain a bullish stance… but as always, stay flexible.

KGC

821x buy: KGC (or NTG)

(watch video below for market recap and trade details)

KGC – buy with a limit price of $5.19

(If KGC does not get filled we will track NTG instead:)

NTG – buy with a limit price of $18.56

Other 821x buy ideas:

Domestic equities and ETFs:
FN – buy with a limit price of $36.27
PRMW – buy with a limit price of $11.49
IIIN – buy with a limit price of $38.74
MLM – buy with a limit price of $189.13
CDK – buy with a limit price of $55.85
CRTO – buy with a limit price of $45.63
SMH – buy with a limit price of $56.59 (semiconductor ETF)
XLE – buy with a limit price of $68.24 (energy sector ETF)

International ETF (Columbia):
GXG – buy with a limit price of $9.19

High Yield Bond ETFs:
HYG – buy with a limit price of $84.47
JNK – buy with a limit price of $35.53

I only track one 821x model portfolio trade at a time for educational purposes.  Remember, 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.

Please read the terms of service.

 

Facing-a-Fear (2)

no need to fear a big drop

“News” that George Soros is shorting stocks grabbed headlines once again this week.  I don’t see why this is getting people so worked up.  Soros has supposedly been making big bearish bets since the beginning of the year.  He’s been warning of a repeat of the 2008 financial crisis and apparently has a 2.1 million share put option against the S&P 500.

I have no clue if George Soros is right.  However, I do know that “news” like this does nothing to help us make money.  We make money when we position our trades in the direction of the 8 and 21 day moving averages.  Right now these moving averages are rising, so we are bullish and long stocks.  In fact, this week the S&P 500 poked through the highs of last November, essentially negating the macro pattern of lower highs and lower lows that has controlled the big picture over the last year.

The only argument bears can make now is that this was a failed breakout which will lead to a fast drop lower.

failed move leads to a fast move?

failed move leads to a fast move lower?

I will grant that this is a possible scenario.  However, the weight of the evidence we have right now still points to higher prices.

If Mr. Soros and the bears turn out to be right, we will have plenty of time to change our stance and position our portfolios accordingly.  We would lock in profits and raise cash as our holdings give us 821x sell signals one by one.  We could look to move some money into other asset classes such as bonds and/or gold.  Finally, we may take bearish bets against stocks alongside Soros by purchasing inverse ETFs,

We will have sufficient early warning.

We have a plan of action.

There is no reason to fear.

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.

stubborn (560x372)

don’t be stubborn!

Stubbornly defending what you believe to be right in the face of harsh opposition is an admirable quality.  It takes strong inner fortitude to enable someone to not be swayed to and fro by the opinions of others.

As admirable as this quality can be when dealing with others, it is possibly one of the WORST traits you can have when dealing with the market.  Allow me to explain.

No matter how smart you are or how much research you do, there is no way to be right 100% of the time.  The only reason you buy a stock is because you believe it will increase in value. However, before you put one penny at risk make sure you know where you will cut your losses.  If your trade gives you your predetermined sell signal, have the humility to admit you were wrong.  Don’t be stubborn.  Don’t rationalize.  Don’t hold and hope.  Hit the eject button and sell.  Yes it sucks to book losses, but it’s not worth the risk to continue to hold.  If the stock is any good it will setup again and give you another buy signal down the road.  If not, you can watch it implode from the sidelines.

It makes sense and sounds easy to do when talking in the abstract, but the fact is, even billionaire hedge fund managers can be prone to stubbornly digging in their heels when they have a trade going against them .  Case in point: Bill Ackman of  Pershing Square Capital Management and his dogged determination in defending one of it’s top holdings, Valeant Pharmaceuticals (VRX).

In fairness, being a “contrarian” has always been a part of Ackman’s shtick and he IS a billionaire, but wow, from a distance this looks like pig-headed obstinance on a grand scale.  When VRX got cut in half from August to October 2015 Ackman doubled down and increased his stake.  Then, earlier this year when VRX was hovering around $90, he added to his position again!  Now after another bloody week. VRX has just one tenth of the value it had seven months ago.

ouch!

there has to be a sell signal in there somewhere!

I know that there are many different ways to make money in the market, but WE NEVER ADD TO LOSING TRADES in the 821x system.  We take our loss and move on.  Why would we want to tie up fresh money in a down trending stock?

As Bill Ackman can attest, stubbornness when trading can be quite expensive.

"If I believe that I am right, I will take it to the end of the earth until I am proven right."
- Bill Ackman