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Confuse Us Say: When River Flow Uphill, Bear Must Float

About a year ago I began offering both long and shortsale swing trade chart picks as a (potential) value added feature to the usual general market analysis and forecast in these reports. That service has grown as I’ve honed the methodology and gotten better results. This week, I want to share some thoughts not only with subscribers who support the service, for whom I’m eternally grateful, but also with non-subscribers. So please “bear” with me. 

Technical Trader subscribers can skip this and click here to download the report.

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The lesson of the chart picks this week was this. It’s good to be good, and better to be lucky, especially if we learn from it.

List performance for the week was both good, and lucky. It had one of the best performances since I began offering chart picks last year. With an average holding period of two and a half weeks – 18 calendar days – the average gain rose to 10.3%. That’s on an all cash basis, equities only, no margin, no options.

You could juice the return by playing with fire, oops, I mean options, or you could use margin, which works great when they give you free money and you’re generating consistent profits. It works the opposite of great when you’re not.

Now, I don’t like risk. I like to boost returns over the long haul by reducing risk in the short run, avoiding the slings and falling earnings turds of outrageous fortune whenever possible.

In addition to earnings turds we also have the more pervasive problem lately of lousy entries. All the massive gaps we’ve had on the open in New York since early November have made it virtually impossible to get a good entry price on Monday mornings after these reports are published. So a couple weeks ago I instituted a few changes in how I would open chart picks, recounted as follows:

11/30/20 That [+4.8%] compared with an average of just a 1% average gain as a result of the disastrous entries on Pfizer day, November 9. New York opened on a huge upside gap that day and spent the rest of the week backtracking.

The list has now recovered from that bomb in the pond, but massive opening gaps have become the norm, rather than a rarity. Therefore, I’ve instituted some changes in how I open these picks. I now use a price bracket, shown on the table, outside of which I will not add the pick to the list. Also, I now use 9:45 AM as the entry time price, rather than the opening. There are exceptions, which are noted in the table.

Another difference this week is that the buy picks will not be opened on Monday as usual. Liquidity analysis suggests weakness until Thursday. I’m allowing that to influence my thinking on entry. This is something new. Normally, I stick purely to the technical. It may or may not work out. We’ll see.

When the game changes, we want to change with it. There are only a few immutable rules, like Rule Number One- “Don’t fight the Fed.” And Number Two- “The trend is your friend, don’t fight the tape.” The other rules keep changing, to mess with our heads. So we need to be adaptable.

Being adaptable, and making small tactical changes, helped us dodge a bullet last week. But I can’t take credit. It was pure luck.

Here’s how that went down.

One of the picks (SPLK), which stands for “splat,” or worse, dropped a surprise turd on the Street with its earnings call after the bell on Wednesday. Our planned entry time was 9:45 AM Thursday with a Do Not Enter Stop of 192. It opened Thursday way, way below the stop price. At 9:45, the planned entry time, the stock was trading around 153, after closing on Wednesday around 205.

Phew! We dodged that! Had we entered on Monday, the loss as of Friday’s price would have been 23%.

But what about stops you say? Stops are no defense against earnings turds. These things trigger such rapid, explosive market diarrhea that the price gaps the stop. We’ve already had that experience once before.

In view of that, I propose an entry rule designed to avoid earnings turds. The model will check to see if a prospective pick has an earnings call scheduled within 10 calendar days. If it does, I’ll avoid it.

My swing trade chart picking philosophy is technically based. TA is not perfect. It does not know everything. Shit happens. TA often does not foreshadow bad earnings surprises.

Besides, we’re not trying to trade earnings calls. I have no way to guess who’s going to have great earnings, and who’s going to drop a turd. Other people may do that and do it well. It’s not what I do. So I’m going to stay away from that kind of inordinate, unpredictable, uncontrollable risk. I’ll do so by avoiding bets on who may or may not have good or bad earnings coming within less than the typical minimum holding period of successful picks.

Meanwhile, the decision to delay entries and use a price bracket for whether to enter or not isn’t perfect either. Besides helping to accidentally dodge a bullet, it also cost us some gains. Had we entered SNPS on Monday, we would have been ahead 5.1% on that at Friday’s close. Ditto PKE, up 9.4% from Monday at 9:45 to Friday’s close. But these would not have been enough to fully offset the splat in SPLK.

Here’s a summary how it went for the stuff we avoided.

Chart for subscribers only.

From that small sample, the verdict is to avoid stocks that are due to report earnings.

There’s a good reason for taking a close look at this. We need to know what we missed out on. We need to know what worked and what didn’t, to make a judgment on whether to keep following this strategy, or to make changes.

I’m sorry, but trading models are not immutable. A system can get hot. Then it’s not. Even the best hedge funds with the greatest AI run algos and fabulous supercomputing setups have missteps where they lose money for a period.

Without massive backtesting, I don’t know if this is the best way to handle this, but my gut says it’s better than the alternative. We know that stops can’t protect us. They get gapped when this stuff happens. By avoiding these 15-20% overnight crashes the best we can, such as not entering any position where an earnings report is due imminently, should work better.

OK! We avoided getting hit with the falling turd on this one. Accidentally. So it’s good to be good, and better to be lucky. Not only should we learn from our mistakes, but also when there are lessons inherent in our good fortune. Next time it won’t be luck. It will be use of the knowledge gained from that luck.

To review, for the week, the average gain rose to 10.3% with an average holding period of two and a half weeks – 18 calendar days – as of Friday.

Table for subscribers only. 

Amazingly, UAL, the one stock left from Pfizer day when we had forced entries on enormous upside gaps, has not only recovered, it has done quite well. I was hoping just to minimize the loss. Now the goal is to protect the profit.

It’s also time to think about harvesting profits, so I’ve tightened stops based on cycle line projections on the charts. I have also added information to the list on the amount by which to increase the stop level each day (PPD-points per day). This tactic will keep those picks open that are still within the trend, and close out those that break.

The current performance compares favorably with the previous week which showed an average gain of 4.8% with an average holding period of 11 calendar days. As the average holding period grew this week, the gains accelerated just a tad.

When trends start going parabolic, we must think in terms of, “Gee, this feels close to a top. Let’s add some shorts.” We’ve done a few shorts along the way, and they haven’t worked. This week the screens gave me nothing on the short side. Sorry about that.

There were a few stocks in the screen output with short term sell signals, but virtually all of them came from strong uptrends. So thanks, but no thanks. I want to short stocks that do not feature rising trend support. These uptrends tend to make shorting those stocks a very rough ride at best, if not an exercise in abject futility.

There were 77 potential longs to view from the screening of 600 big cap stocks. Of those I chose 4. They look like late cycle picks, and this could be the end of the line for them, a possible sucker play. I’m prepared to scalp or take losses, hopefully small, on these, but I will let the trend and cycle indicators do their work without imposing my feelings about them.

New picks table for subscribers only.

I’m adding the 4 new picks conditioned on being above their stop prices as of 9:45 AM Monday. I’m foregoing limit prices this week. If all 4 picks are above their stop prices, it will leave us with 14 open picks, all but one of which will be longs.

It certainly seems like end stage exuberance. But that can last for a few months.

Technical Trader subscribers click here to download the report, including this analysis of chart picks, and the broad market trend condition, outlook, and price projections.

Not a subscriber? Follow Lee’s weekly swing trade chart picks with Lee Adler’s Technical Trader, risk free for 90 days!  

These reports are for informational purposes, designed for a broad audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance. 

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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