Morning Market Thoughts
Some thoughts on timing. I’m not talking about “market timing”. I’m just talking about the period of time between deciding that you want to buy something…and actually buying it. That’s the “Decision/Action” approach that I discuss on occasion. Zoom out to see the trend (or lack thereof). If you like what you see, then zoom in to enter the trade…timing the entry via the daily and/or intraday chart activity.You make the decision to buy something. But rather than just click the mouse and buy the stock, you wait for a time and price where (1) You can define your risk because the stock is quite close to a level that, if that level is hit, you can exit the trade because you’re being proven wrong by the stock, and (2) You can see good potential profit in the stock. If you don’t have both of those, then you don’t have a buying opportunity.
One could write an entire book on the concept of buying stocks (and many have been written), and you’d find a lot of different chapters that cover all kinds of things. But here are a few general thoughts.
Assume that you see a stock that you have made a decision to buy. Now, you need to focus on where and when to buy it.
1. Start with the overall market. Is it poised to move higher? Is it breaking out? If so, does it look like it’ll hold up, or is it susceptible to a failure? If it’s pulled back a lot, is it rebounding off support? Or are you just hoping that it’ll rebound? And if it is rebounding…is it going to run into a lot of supply very soon? In other words, will it have room to run, or is this just going to be another small move inside a channel that sucks you in at the top, and spits you out at the bottom?
2. If the market has been churning/consolidating in a fairly narrow range (perhaps, say, 10%…and definitely not wider than that), then it’s forming a base. It might be a “high base”, which is really just a consolidation after a big uptrend. Amazon (AMZN) resembled this in May-July. Compare AMZN with Alphabet (GOOGL), which has been consolidating in a “high base” between $700-$800 for nearly a year. It’s great when a stock like GOOGL has such a prolonged base. But there’s one problem: The “base” is really wide. Why does this matter? Because a breakout from a very wide “base” might have limited upside simply because of the amount of aggressive buying activity (accumulation) that it took to simply traverse the distance between support and resistance. So by the time the stock actually “breaks out”, the bulls are nearly spent. There’s just not much demand at the higher, breakout level. So a breakout from a very wide channel that followed an uptrend might not have the kind of staying power (upside) that a breakout from a narrow channel that followed an uptrend would.
3. This type of analysis applies to the overall market, as well as your stock selections. Market first…then stock. If the market is set up nicely to break out of a range, then your range bound stock will have a greater chance of rewarding you. But if the market is not set up a sustainable move (you can truly tell whether it is or not if you just throw bias out the window and apply what you already know), then your stock is more likely to penalize rather than reward you.
4. To apply this aspect of trading to the market today, I would say that this is not really the time to buy because the S&P is still tending to be sold into any breakout. Look at how extended it is from the 200-day moving average. Yes, it’s been trading in a fairly tight range for the last few weeks, but this high range doesn’t look like consolidation. It’s just too extended, and it appears as if any real breakout won’t go too far before selling hits the market.
If you want some type of objective checklist for buying breakouts, then try focusing on the major moving averages. The stock price needs to be above the 50-day moving average, which needs to be above the 200-day moving average. If your stock doesn’t conform to this cocktail napkin checklist, then maybe you want to look for something else if you are focusing on breakouts.
If you are focused on some trading tactic other than buying breakouts, then your tactics change. But you should have tactics. Without a plan, and criteria for executing the plan, you are just enthusiastic about trading stocks and will have a lot of fun buying and selling. Sooner or later you’ll lose all your money, but you will have had fun in the process. Have a plan!
See you in the forum.
–Dan
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