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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.

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.

 

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
goldwatch

time to watch gold

I made a lot of money on gold’s massive run from 2008 to 2011.  Unfortunately, I unnecessarily gave much of it back because I had not yet been introduced to technical analysis.   Technical analysis of price action allows you to identify and trade along with trends.  Without this knowledge, you are essentially trading blind.  You might as well be gambling.

Gold peaked in 2011, went sideways in 2012 and started heading lower in 2013.  It’s been trending down ever since, going from a high of nearly $1,900 an ounce in late 2012 to a low of  $1,045 in December of last year.

There is no compelling reason to buy (or even own) something in a downtrend if you are trying to make money.  Sure, you could happen to buy in at the exact bottom by pure luck, but do you really want the success of your trades to be reliant on luck?  Trying to pick exact bottoms and tops is a fool’s game.

It’s much smarter to put the odds in your favor BEFORE risking your hard-earned money.  If buyers are gaining control of an asset over sellers we WILL see it in the price action.  That’s our cue to start paying closer attention.  Don’t worry, there’s usually plenty of meat in the middle of a move for us to profit on.

We are starting to see signs that the down trend in gold is possibly coming to an end.  Gold is up 16% year to date, breaking the down trend line of lower highs for the last two years.  Price is well above the 50 week and 200 day moving averages, both of which are starting to turn up.

gold is breaking the down trend line in place for the last two years

gold is breaking the down trend line that’s been in place for the last two years

Gold is currently extended to the upside.  With the possible exception of buying physical coins as “insurance”, I would not chase it here.  However, I believe consolidations above the 200 day moving average are buyable for a trade.  Watch $GLD, $GDX and $GDXJ for low risk 821x buy signals.

It may finally be time to take gold out of the penalty box and start keeping a closer eye on it.

bear hug

embrace a bear, in cash

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.

no one rings a bell at the top?

nobody rings a bell at the top?

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:

  • Do you know how to identify a potential market bottom?
  • Would you know when it’s appropriate to start aggressively buying stocks again?

Unless you can confidently answer yes to both questions, you absolutely should NOT put your retirement accounts in cash.

why average investors should not "flip to cash"

why average investors should not “flip to 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.

stoicism

focus on the process

Some things are within our control.  This category is the internal realm which includes our actions, perceptions and attitudes.

Then there is everything else; things we only have limited influence over at best.  This is the world external to us which includes the actions of others and nature for example.

Stoic philosophy contends that confusing these categories is the primary source of our unhappiness.  How many people fret over things which they cannot control, resulting in unnecessary stress and frustration?  There is no reason to allow external events to hold our happiness hostage.  We hold the power to avoid this self-imposed trap by simply changing our attitude and focus.

Again, obsessing or stressing about things outside of our control is counterproductive. 

Instead, we should focus our effort and energy on those things we actually do control.  

I make it a point to live by these principles.  Not because I’m such a great guy, but because I’m allergic to stress.  Seriously, I detest stress.  Stress ages youStress makes you fatStress weakens the immune system.  Stress just plain sucks.

Also, I don’t want to pointlessly spin my wheels.  Life’s too short.  I only want to invest my limited time and energy on action that counts.

One example of how this principle looks applied is process vs. outcome.  We control the processes we develop and follow.  However, we do NOT control the outcome of those processes.

Let me give you a real life example.  When we were trying to sell our house in San Antonio, it took much longer than expected or hoped.  As the summer started to draw to a close, I could feel the stress level my wife and I experienced start to elevate.  After every showing, we were consumed with self-doubt, second guessing ourselves with questions: “Are they going to make an offer?”  “Why aren’t they calling?”  “What’s wrong with this house?” etc.

Eventually I started to remind my wife (and myself) that we don’t control the whether the person viewing the house will buy it or not (outcome) so there is no point in worrying about that.  Let’s just focus on cleaning the house and making it appear inviting before each showing (process) and be content with doing our best.

If we focus on improving and following our process, the outcome will generally take care of itself.

Of course, we eventually did sell that house and importantly, we did it while also saving ourselves a lot of unnecessary stress when we changed our focus and mindset.

This principle can be helpful in many areas of our lives, such as if we are trying to lose weight or learn a new skill.

It also happens to be especially useful when trading.

We have absolutely no control whether a stock goes up or down.  The only thing we control is when we buy and when we sell.

It’s critical to remember this, especially when we inevitably hit a string of losing trades.  It’s easy to lose our confidence which can paralyze us from taking further action.  Worse, we may lose our discipline and try to “make it all back” by taking on too much risk and then end up blowing up our trading account.

We must remember to focus on what WE control.

Develop and follow a proven trading system.  If you need help, start with my 821x system.

Don’t obsess on whether a trade was profitable or not.  Again, you have no control over that.  It’s pointless to beat yourself up over a losing trade.

Instead, evaluate how well you followed your trading system.  Did you chase a stock that was spiking higher?  Did you panic and sell early or get stubborn and hold on too long?  Did you break your own rules?

Over time your decision making skills will become congruent with your system.  It will become habit.  It will become second nature.

Only after you reach this level can you start to gain enough experience to know when a market environment dictates that you deviate from your system.  This is the level of the elite performer and is obviously not something a beginner should attempt.  It’s just like any other competency.  You must start with the fundamentals and internalize them before you can begin to attempt to understand when it may be appropriate to override them.

So learn your trading system.  Internalize the rules.  Consistently follow your process.

Your trading system should be designed to identify and cut losing trades quickly and let your winning trades run.

Trust that over time you WILL achieve the outcome you desire, an overall increase in wealth.

If you are distressed by anything external, the pain is not due to the thing itself, but to your estimate of it; and this you have the power to 
revoke at any moment. - Marcus Aurelius

portfolio introduction and new trade

(watch video for details)

IRMD – buy with a limit price of $26.50.

Other idea INFN – buy with a limit price of $19.76.