Gap  Ups

Buy  High  and  Sell  Higher

If you turn over 10 stones, you might find 1 attractive investment idea but if you turn over 100 stones, you might find 10.

By Peter Lynch (Manager of Magellan Fund 1977 - 1990)

We shall be heading into the 4th quarter earnings report with 10% of the $SPY components slated to come to the earnings confessional booth in about 2 weeks.  Stocks exhibit volatility and surprises during the earnings report.  Quite often, the leading stocks of high institutional quality will gap up in price and attain an all time high overnight.  Institutions like hedge funds, pension funds, mutual funds and other professional money mangers are the reason for these gap ups in price overnight.  They have the strength of $$$ power to propel these stocks higher.  Quite often some of the leading stocks will attain a gain of  +20%  or higher within days and start consolidating the gains for the next several days or weeks. 

IBD (Investors Business Daily) has an  '8 Weeks Hold Rule'  for stocks that show strong institutional demand.  The rule suggests that if the stock attains a  +20%  gain or higher from its proper buy point in less than 3 weeks, one should hold it for 8 weeks and evaluate the stock at that point.  Mr. William J. O'Neil (founder of IBD) found that quite often such stocks continue to make higher gains after attaining the explosive gains of over  +20%  within a short period of time.  Demand from the institutions is so great that the stock gets propelled higher from the sheer size of the demand from the institutions.  Institutions often curb their enthusiasm for the stock after attaining high price so quickly just so as not to exhibit their intentions of wanting to acquire more of the stock.  

As a Growth Stock investor and a trader that follows IBD (Investors Business Daily) style of investing, one must:

  "Buy High and Sell Higher"

It seems counterintuitive but that's how one attains double digits and triple digits gains in a Growth Stock.  As a standard practice, I always prepare a separate watch list of stocks that have gapped up in volume during earnings report.  Sometimes stocks will gap up from mergers and acquisition as the  $PTON  did last week.  I had mentioned this stock in my blog post of Sunday December 20th.  Initial stock position was established at it's buy point of $139.75 on Monday December 21st.  It gapped up the next day and is currently +14%  in 3 days.  Currently it's trading above the upper Bollinger bands and will likely retrace in the coming days to consolidate the gains.  

Performance of Stocks That Gapped Up

To illustrate the power of gap ups, here are the results of some of the stocks that were on my Gap Up Watch List.  April 3rd was the  "Follow Thru"   day after the brutal downtrend we experienced with the March 23rd lows on the  $SPY  and  $QQQ.  These results are year to date from the  April 3rd  "Follow Thru"  day.  Stocks that are bold faced are the stocks currently in my portfolio.  Some of these stocks could possibly provide an opportunity to scale up if they retrace to the 50 day sma (simple moving average) and the institutions support them at that level.  Concentrating your portfolio to just a few leading stocks is the true way to attain out size gains with the Growth Stocks.

1. $AMZN   ... +66% (Mentioned Blog post 6/28 and 9/13)
2. $CELH    ... +1071%
3. $NIO       ... +1807% (Mentioned Blog post 10/29)
4. $PDD      ... +119%
5. $PINS     ... +414%
6. $PYPL     ... +158%
7. $PTON     ... +469% (Mentioned Blog post 12/21)
8. $RH         ... +458% (Mentioned Blog post 10/22)
9. $SNAP    ... +353%
10. $TTD      ... +480%
11. $ZG        ... +295%

Happy Trading!

Amin

 

 

Stay    FOCUSED 

Merry    Christmas 

"Obstacles are those frightful things you see when you take your eyes off your goal."

Henry Ford, car producer

There is a lot of noise (political tweets) and fear (Virus and the vaccines) out there in the market.  Listening to the news media and watching tv all day long is not going to get everyone a stimulus cheque or cure the effects of a virus with a vaccine.  We are traders and investors.  Our job is to increase the size of our portfolios and hold all our opinions to ourselves.  Don't engage in conversations on social media about the pandemic or the stock markets.  It's going to depress you and compromise your immune system.  Use your time wisely and instead:

• Get a good night sleep.  You now have an opportunity to catch up on your sleep.
• Start your day performing stretches and light exercises.  You always wanted to get in shape and now you can actually follow your New Year's resolution since we are all working from home now.
• Eat a healthy breakfast to start your day.  It will help you kick start your day without the pressures of having to run out the door to your job and be stressed commuting.
• Get dressed up as if you are going to work or school.  Now is a perfect time to polish up your trading skills and look over your weaknesses.  
• Take an online class on trading and investment.  Watch some utube videos of some of the professional money mangers.  Learn what traits and discipline they possess that makes them successful.  
• Communicate with friends, relatives and acquaintances that motivate you and keep you energized.
• Learn to read stock charts and back test your system of trading and investing.
• Polish your system of trading and write it down.  Identify your rules of when you will buy stocks, when you will sell them for a profit or a loss and how long will you hold on to that stock.  This will be your system of rules that will help you develop a Trade Plan for every stock you initiate a position on.
• Prepare and update your stock watch list everyday.  Do lots of  "Virtual Trades"   (utilizing your brokers platform on your virtual account) and back test your system.  

This will be a short week in the market.  For the month of Dec so far, $QQQ  is  +3.89%  and has stayed above the 21 day sma (simple moving average) for the last 6 weeks.  We do have a high count of 7 total distribution days between the  $SPY  and the  $NASDAQ.  This will be a light volume week in the market.  One of the stocks to watch this week is  $PTON.  It has a history of hugging the upper Bollinger bands for 17 to 20 days during its most recent run up.  Currently it's above the faster moving 8 day sma and has been hugging the upper Bollinger bands for the last 5 sessions.

Good luck trading this week.

Happy Trading!

Amin

Santa  Claus  Rally

Ryan Detrick, CMT, Chief Market Strategist and Senior Vice President of LPL Financial tweeted 3 days ago:

"December is usually a strong month for stock, but Santa doesn't show until the second half of the month"

There are no guarantees that the market will be predictable precisely for a rally in later half of December.  Market actually severely corrected from October through December in 2018.  In 2019 on the other hand, the market roared from October all the way through middle of February before it went into correction.  Last week there was a major distribution day on Wednesday the 9th when institutions sold off the technology stocks that were propelling the indexes higher.  $QQQ  dropped  -1.25%  while the  $SPY  dropped  -0.96%  that day.

As a retail trader and an investor, one ought to be prepared for sudden changes in the market.  I often react to market conditions and plan accordingly looking over the data of price and volume. 

"If  THIS  happens  than  I  do  THAT"
"If  THAT  happens  than  I  do  THIS"

It's very hard sometimes when we are constantly bombarded in the media by all the self proclaimed market  GURUS  and stock analysts sharing their opinions.  We also have to fight back our own personal biases and analysis of the stocks.  Every week it's a roller coaster with Mr. Trump tweeting creating uncertainty.  There is also virus to contend with and possible lockdowns.  Trucks are already rolling in as I write this post to distribute the vaccine that have been approved by the FDA. 

 

"Market   fools   the   majority"

DATA  doesn't lie and I find it best to let the data be the driver of our decisions.  Supreme courts have already ruled and on Monday December 14th, electoral college will cast their ballots declaring Mr Biden as our next president effective January 20th.  Market hates uncertainty and the uncertainty of our elections will be put to rest.  Market really doesn't care of anybody's opinions, religion or political bias.  As a retail trader and an investor, we are here to increase the size of our portfolio and mitigate risks in the market.

Scrutinize  Your  Process

We are at the tail end of the 3rd quarter earnings season.  That removes one of the risk factors going forward for the next 4 weeks.  One of the things to do over this week is:

• Harvest some profits if the stock has attained profits of +20% to +25%.
• Watch stocks that have fallen below the 21 day sma (simple moving average).
• Monitor stocks on your watch list that are doing better than the  $QQQ  or  $SPY.
• Have some  CASH  in your account to scale up in stock positions that are supported by the institutions at the 21 day sma.
• Mitigate risk if the market skips a beat and goes into correction.
• Always reduce your position prior to earnings report to avoid a nasty surprise.
• Have the discipline to follow your trade plan and cut your losses at  7%  or less.  

Performance  of  Stocks  On  My  Watchlist  

There were 10 stocks out of the 58 that I had published on Nov 4th  'Follow Thru'  day that I had highlighted.  They were showing signs of accumulation by the institutions.  One of the discipline that retail traders and investors ought to perform every week is to compare the performance of stocks on watch list against the performance of the  $QQQ  and  $SPY.  This way you are holding yourself accountable and fine tuning your process.  Here are the results:

1. $APPS   ... +17%
2. $FSLR   ... +8% (held up at 21 day sma)
3. $NIO     ...  +11% (Oct 29th post - made sizable gains. Took starter position $42.47 Dec 4th).
4. $PLTR   ... +155%
5. $PLUG   ... +61%
6. $ROKU   ... +53%
7. $SQ       ... +26%
8. $TTD      ... +46%
9. $U        ... +45%
10. $ZG      ... +29%
11. $SPY   ... +6.6% (General Market Performance)
12. $QQQ   ... +5.2% (Growth Stock Performance)

Average performance of my 10 strongest stocks is  +45%.   

 This amounts to 6.8 times better than the General Market and 8.6 times better than the Growth Stock performance. 

 I know I have a very strict process and criteria that enables me to identify the true leaders in the market.  Should the market correct like it did in 2018, I know there is plenty of cushion for me to ride out and scale down the positions.  On the other hand, should market consolidate and propel higher, I have a process in place to scale up in stocks that have earned me substantial profits.  $NIO is one of those stocks that I began accumulating once again last week.

Good luck trading this week

Happy Trading!

Amin

 

Simple    Moving    Average    Lines

"We've all heard the saying, 'timing is everything'. This is just as true in the stock market as it is in life. Knowing the optimal time to buy or sell a stock is a valuable skill anyone can and should learn" 

By Willian J O'Neil (Founder of Investors Business Daily)

Simple moving average (sma) lines are very simple tools to use for taking a position in a stock but also to exit a position for profit as well as exiting the position to mitigate loss.  Institutions account for more than 70% of the trading volume in the stock market.  Ultimately it is them that determine what the stock price is going to be.  If they  decide to enter a stock position, it may take them several weeks to accumulate the entire position.  Stocks will show that by having the price of the stock staying close to the faster moving 10 day and 21 day sma.  Conversely, if they decide to exit the position, it will show up as high volume of stock trading and the price will begin to get depressed lower.  It will show up as the  faster 10 day and the 20 day sma heading lower towards the  slower moving 50 day sma.


50 day moving average line is one of the most closely watched lines by the institutional investors.  Once the stock approaches this line after trading above the 20 day sma, retail investors ought to pay attention to see if the stock gets supported by the institutions at this level.  Institutional buyers will come in with huge volume buying to pick up these shares when they are committed to the stock.  One of the clues to look for during  'distribution days'  is to determine if your stock is being supported or disposed of by the institutions.  If your stock is supported and it bounces off the 50 day sma in volume considerably higher than the average daily trading volume, one might want to consider initiating a new position or adding on a second position in the stock.

How  Did  My  Stock  Perform?

We had a  "Folllow Thru"  day declared by IBD (Investors Business Daily) on November 5th.  $RH  stock was scaled up with a 7th additional position on November 6th @387.50.  Currently the stock is trading at $468 as of Friday December 5th. That's a return of  +20.77%  in just 4 weeks for this position.  Look over the charts and notice how the stock has been hovering above the 21 day sma.  Original position on $RH was initiated on April 8th at  $110.56.  Additional positions were added and scaled up as follows.  I have indicated in parenthesis the  %  profits for each of those positions as of Friday Dec 4th market close:

1. April 8  ... $110.56(323.30%)
2. June 8  ... $250.00(87.20%)
3. July 1   ... $250.29(86.98%)
4. Aug 26 ... $320.00(46.25%)
5. Oct 5    ... $375.00(24.80%)
6. Oct 15  ... $382.50(22.35%)
7. Nov 6   ... $387.50(20.77%)
8. Nov 13 ... $397.00(17.88%)

 

1st position at $110.56 initiated on Apr 8th after a  "Follow Thru"  day was the largest position, followed by smaller scaled up position at every step of the way.  When it comes time to harvest the profits, the last positions taken will have their stop limit orders triggered to mitigate losses.  It helps to understand the simple moving average lines of 10 day, 21 day and 50 day.  These are the lines that institutions follow and as retail traders and investors, we need to be in synch with the institutional investors.

   

It's a good idea always to plan for the worst and hope for the best.  Weekend is a good time to look over the stock charts and scrutinize all your positions.  Check the performance of your stocks to see if they are being supported by the institutions.  Get rid of the ones that are dropping off below the 21 day sma in higher volume than an average trading volume.  Compare the performance of your stocks against the  $SPY   and  the  $QQQ.  As a growth stock investor, you want your stock to outperform these 2 indexes.

I am hoping my analysis and the exercise with  $RH leading  stock helps you fine tune:

• Your selection of stocks to put on your watch list.
• Monitoring the performance of the indexes and the stocks utilizing simple moving average lines.
• Looking for clues of institutional support and resistance lines with the aid of simple moving average lines on the chart.
• Respecting losses in a stock of -7% to -8% and immediately cutting your losses.
• Monitoring the 50 day sma and the performance of the indexes and your stock in relation to this line.

I encourage comments and suggestions from my readers about the nuances of the moving averages that I may not have fully covered.  This post is to help guide you to maintain the profitability utilizing a very simple indicator of simple moving average lines plotted on your stock charts.

Happy Trading!

Amin