Thursday, May 16, 2013
The "Rubber Band Rule" of Trading
Feel like missing out on the stock market rally? Don't worry: there is a very simple rule: price is attached to an invisible "rubber band" (also called "moving average") and price has always snapped back to it. I guarantee you it will happen again, so just wait and "sit tight".
Wednesday, May 15, 2013
Discussion of my Latest LNKD Trade
On Monday, I went long LNKD. The stock did set up a textbook-like Failure Test signal (check out Adam Grimes' video at http://www.youtube.com/watch?v=mVCH9ceqkss to learn more about the pattern).
Essentially, price bounced at short-term support on a second post-earnings consolidation leg. This is a great pattern, which allows tight stops and therefore relatively large position sizes and great risk/reward ratios. In the case of LNKD, the second (weaker) leg make the pattern even more significant.
Disclosure: Covestor Model is long LNKD
Essentially, price bounced at short-term support on a second post-earnings consolidation leg. This is a great pattern, which allows tight stops and therefore relatively large position sizes and great risk/reward ratios. In the case of LNKD, the second (weaker) leg make the pattern even more significant.
Disclosure: Covestor Model is long LNKD
Tuesday, May 14, 2013
Short Squeeze: How to Trade it and to Find the Next TSLA
One of my current positions is long TSLA to benefit from the potentially massive short squeeze. Granted, the stock already rallied from $40 to $90 within the last six weeks, but with over 35% of floating stocks held short, the run might no be over. One is reminded of the epic 2008 Volkswagen short squeeze, which shot the stock from 200 to almost 1000 Euro within one month. Note that VW is even not a small cap stock:
So if VW can quintuple ones investment, TSLA should be able to run at least from $40 to $200, shouldn't it?
Even though a fivefold run seems like a great profit opportunity, the rally is extremely difficult to trade due to massive volatility: if one sells to early, he leaves money on the table, selling too late (and we are talking about days here) and the profit is gone. The solution: don't be a pig. Scale out of the position during the move higher. It is impossible to predict the absolute top of the move. During a short squeeze, price is extremely sensitive to news and rumors, so headline risks are very high.
The other question is how to find the next TSLA. Obviously, short interest needs to be high. It is not possible to predict a short squeeze by monitoring shorts alone. These are usually sophisticated investors, who sometimes have a clue what they are doing. I believe one needs to understand the thesis of the short sellers and when this thesis breaks down. Technicals don't help.
For TSLA, this was pretty obvious: shorts thought that the company won't be able to profitably produce electric cars. Two events killed the thesis: on April 1, Tesla announced that Model S sales exceeded sales targets. That's when the stock started to move. Finally, the company took off after reporting a profitable quarter last Wednesday.
Another contender for a short squeeze is Blackberry, 31% of float is held short. The thesis is simple: BBRY will not manage to survive in the competitive smartphone market. I'm looking at the news flow for indications that the thesis might be wrong. Besides some recent M&A rumors, I haven't really come across significant positive news yet.
Disclosure: Covestor Model is long TSLA
The 2008 Volkswagen short squeeze.
So if VW can quintuple ones investment, TSLA should be able to run at least from $40 to $200, shouldn't it?
Compared to VW, TSLA has more room to run.
Even though a fivefold run seems like a great profit opportunity, the rally is extremely difficult to trade due to massive volatility: if one sells to early, he leaves money on the table, selling too late (and we are talking about days here) and the profit is gone. The solution: don't be a pig. Scale out of the position during the move higher. It is impossible to predict the absolute top of the move. During a short squeeze, price is extremely sensitive to news and rumors, so headline risks are very high.
The other question is how to find the next TSLA. Obviously, short interest needs to be high. It is not possible to predict a short squeeze by monitoring shorts alone. These are usually sophisticated investors, who sometimes have a clue what they are doing. I believe one needs to understand the thesis of the short sellers and when this thesis breaks down. Technicals don't help.
For TSLA, this was pretty obvious: shorts thought that the company won't be able to profitably produce electric cars. Two events killed the thesis: on April 1, Tesla announced that Model S sales exceeded sales targets. That's when the stock started to move. Finally, the company took off after reporting a profitable quarter last Wednesday.
Another contender for a short squeeze is Blackberry, 31% of float is held short. The thesis is simple: BBRY will not manage to survive in the competitive smartphone market. I'm looking at the news flow for indications that the thesis might be wrong. Besides some recent M&A rumors, I haven't really come across significant positive news yet.
Disclosure: Covestor Model is long TSLA
Monday, May 13, 2013
Investors Too Bullish Short-term
The Equity Put/Call Ratio is flashing a warning sign. When the indicator traded at similar levels in the last two years, the market corrected 9 out of 13 times. ("successfully" predicted corrections market with red symbol in chart below). Note that this indicator just predicts short-term corrections. The intermediate-term uptrend is not at risk.
Saturday, May 11, 2013
Hulbert: "Can You Beat the Market?"
Catchy headline from Mark Hulbert in the Journal this weekend, hinting that advisors have almost no chance to beat the market. I have two additional points:
Coval et al. (2003) found in their research that a few individuals are indeed able to beat the market on a consistent basis.
The Covestor Technical Swing Model has been beating the market since inception in 2007.
Just saying...
Coval et al. (2003) found in their research that a few individuals are indeed able to beat the market on a consistent basis.
The Covestor Technical Swing Model has been beating the market since inception in 2007.
Just saying...
Posted with Blogsy
Friday, May 10, 2013
Why I Shorted HSY Yesterday
Defensive names have weakened significantly in recent weeks. I have been looking for potential shorts in the Consumer Staples industry. Yesterday, I pulled the trigger on Hershey Foods (HSY).
The stock did set up a classic "Anti" trade: after a strong impulse move to the downside, HSY rallied on weakening volume and broke down yesterday. The stock declined despite an ok earnings report (EPS beat, in-line earnings and guidance). As one can see from the chart below, relative strength has been collapsing since the middle of April, another bearish sign. I indicated target and stop points as well:
Disclosure: Covestor Model is short HSY.
The stock did set up a classic "Anti" trade: after a strong impulse move to the downside, HSY rallied on weakening volume and broke down yesterday. The stock declined despite an ok earnings report (EPS beat, in-line earnings and guidance). As one can see from the chart below, relative strength has been collapsing since the middle of April, another bearish sign. I indicated target and stop points as well:
Disclosure: Covestor Model is short HSY.
Tuesday, May 7, 2013
How I Plan to Trade Gold Here
Gold is setting up a textbook-like short entry and I'm looking into taking this trade. Peter Brandt posted a similar chart. In order to add something to the discussion, here is how I plan to trade it (BTW: once I will be registered -hopefully during Summer- I will not be able to write these things anymore, so enjoy the posts while they are here):
I will probably short GLD today with a stop around $1,520 on the spot price. This is not a tight stop, but we might see another move higher. Should the second up-leg be a weak move, I would even add to the postion. I plan to take initial profits (start to scale out of the position) at 1,350 and let the rest run until Gold hits new lows at 1,270. This trade has a reward/risk ratio of 4:1.
In addition, I'm looking into shorting Junior Gold Miners (ETF: GDXJ). It currently costs around $1,200 to get an ounce of Gold out of the ground. A Gold price near $1,200 would take many junior miners out of business. So miners could continue to underperform the metal.
I will probably short GLD today with a stop around $1,520 on the spot price. This is not a tight stop, but we might see another move higher. Should the second up-leg be a weak move, I would even add to the postion. I plan to take initial profits (start to scale out of the position) at 1,350 and let the rest run until Gold hits new lows at 1,270. This trade has a reward/risk ratio of 4:1.
In addition, I'm looking into shorting Junior Gold Miners (ETF: GDXJ). It currently costs around $1,200 to get an ounce of Gold out of the ground. A Gold price near $1,200 would take many junior miners out of business. So miners could continue to underperform the metal.
Monday, May 6, 2013
Why Stocks Could Run Much Higher According to this Indicator
An interesting, but rather complex technical indicator is Welles Wilder's average directional movement index (ADX). It tries to quantify trend strength. What's fascinating is that ADX is highly autocorrelated with a period of three to six months.
Friday, May 3, 2013
Monday, April 29, 2013
Interesting Consolidation Pattern Emerging Again?
US Equities have recently established an interesting consolidation/advancement pattern, which can be divided into three phases:
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