Morning Market Thoughts

by DAN Good morning. Stocks are a bit higher this morning, though with no particular theme as to leading/lagging sector. We haven’t really looked at biotech for a while, and the sector is still building a base. Look at the Biotech ETF (IBB). It’s in a well-defined range. A few random stocks to consider would be BLCM (coming out of a squeeze), and Endo International (ENDP), which is coming off a higher low of a double bottom. I’m not recommending them — just pointing them out.

The consumer staples continue to work. MO, PM and RAI are still under accumulation, with RAI pulling back just slightly but still on track.

The gold sector is pulling back today and looks to be starting “Phase 2” of the volatility squeeze process. Phase 1 is the blast off. Phase 2 is the pullback. Phase 3 starts when Phase 2 finds support, and the bulls push the stock back to Phase 1 highs. Now, we’re still looking for a low, which I suspect will be found today. Gold is definitely extended, but I do not think it’s going to correct too deeply. The conditions around the world are right for the accumulation of precious metals.

Tomorrow will be a fairly critical day in the market because the Labor Department will release the June labor statistics. As I write this, I am honestly not sure whether it will be much of a market mover. The Fed has acknowledged that they are pretty much held hostage by Brexit uncertainty and that rates will remain unchanged for quite some time. Wouldn’t surprise me if James Bullard hinted at an upcoming rate hike, but that’s his schtick. He says that all the time. Honestly, I won’t be paying much attention to him. I just want to watch the S&P.

A reminder: The market is largely stuck in a trading range. This is the time when people tend to drain their accounts because they keep buying at resistance with the expectation that the market will break out. Don’t do that. Let the market tell you what to do. Take your cue from the market.

If someone were to ask you, “Why are you buying that stock?”, you should be able to give them a clear answer.

You might say, “I just have a feeling about it. I think it’s gonna break out” isn’t really a great reason. Saying, “Well, the stock is in a pretty good uptrend. See this line? That’s where the stock seems to rebound when it pulls back. It’s not exact…but it’s close. So there is demand for the stock on any kind of pullback. Look. You can see the pattern of higher highs and lows. The stock has just drifted down to the trendline and I’m seeing some buying. Those green boxes show strength in buying. They’re starting to move higher. So I see this pullback and what appears to be a rebound as a good, low-risk opportunity to buy the stock because I know what has to happen in order for me to see that I’m WRONG.”

Response: “Huh? You’re looking for evidence that you are wrong? Seems like you’d want to be hoping for good things.”

“Well, hope isn’t a trading strategy. Here is what I hope. I hope my puppy doesn’t crap on the carpet. I hope the neighbor’s kid turns down the music that’s blaring in the back yard before I go to bed. But there is no “hope” in trading. My reason for being in the stock is because I think the rising trend line is going to remain relevant, and that I bought the stock at a good price. I’m pretty sure the trade will work. But I’ll know the trade is NOT working if the stock starts falling back below the trendline. If that happens, I’ll sell the stock. And since my purchase price is only 2% higher than the “oops, I’m wrong” level, this is a low risk trade that should work. So I’m not risking a lot of money on the position. If I’m wrong, I’m wrong. Meh.”

So the other guy seems to get it. A week later he comes back and sees that your trade is up 15%. He says, “Hey, that trade is really working. I think I’m gonna buy that stock too.”

You look at the guy. You then look at the chart. And you say, “Sigh…Where’s resistance?”

The guy’s response: “What’s resistance?”

Your reply: “Oh, never mind. Excuse me. I’ve got to get another cup of coffee. I think I’m going to put some Bailey’s in it too.”

Moral of the story: Know why you are buying. Specifically. Know what price will tell you that your reason for buying is negated. Know how far you would expect the stock to go before it runs into excessive supply. Know what you plan to do when the stock reaches that level (sell…hold…hedge…etc), and know precisely what your dollar risk on the trade is — i.e., if your stop is hit, how much money will you lose? Be prepared to lose that much money. If it is too much, then buy fewer shares.

That’s all I got this morning.

–Dan

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