The Big Wave Trading Models are currently under a bit of a mixed weighing across the board. We are under a BUY signal in the SP-500 and Nasdaq 100 by proxy. They hit new all-time or 14-year highs. We are under a NEUTRAL signal in the Nasdaq undergoing what appears to be churning price and volume action on the index. The NYSE is under a NEUTRAL condition with a bullish bias. And the Russell 2000 is under a NEUTRAL signal with it just a few points away from switching back to a SELL signal. A close under the 200 DMA will initiate the switch.
As you can see from above the market is mixed. Mixed markets are not good for trend following traders, unless you are an expert stock picker. Stock picking has been difficult in a QE environment as a stand alone methodology. When you combine this, it becomes obvious to the experienced investor that swinging for the fences here and/or trading heavy is not a wise option. Therefore, as we continue to stress this earnings season, if you must trade you must trade small. If you are a new investor, cash is the smartest place to be. 3 out of 4 stocks follow the trend of the market. If the market is choppy, 3 out of 4 stocks will be choppy.
If you need an example of the random nature of the tape, take FB and TRIP for example. Both had very similar to identical price and volume action leading into earnings. Yet, one gapped up and one gapped lower. While there are clear and obvious differences and sector analysis that differentiates them, the key point to be made is that technically they were the same but produced completely different outcomes. If both patterns are presented to the layman he would see similar patterns but the results would be very different. In a strong tape, both stocks would do well post-earnings.
So this chop is what it is. We do not try to fight it. At the same time, when we get solid signals we still take those signals. The difference is that instead of placing 10-20% of our capital into one position we might place 2.5-5% in that one position. Then instead of giving it to an ATR to fail or a trailing moving average, we instead want to see it move higher immediately or else we pair back or sell the entire position. So if we go long a stock here, especially ahead of earnings, and the next day it is not higher or flat (on lower volume) we are out. No questions asked. Does that mean we will get spun around on stocks like MCK again? Sure. But its worth it to prevent being trapped in something like AMZN or MXIM.
The bottom line is that this is not a tape to be trading heavy here or for that matter at all. We continue to only make any real headway by focusing on straddling some stocks ahead of earnings and daytrading momentum, in-play, pump-n-dump, earnings/contract winners in stocks like GLUU, LOCO, WSTI (short), VDSI, etc… .
If you are not a member of Big Wave Trading, we always recommend joining during earnings season as we have a veteran options expert that really understands how to straddle and strangle stocks ahead of earnings. Not to mention the ability to find specialty plays like NQ where in just a week he was able to get a 150% return on his calls. A trade I did not personally take but a trade I must note due to his conviction on the trade. It’s incredible to witness earnings season after earnings season after earnings season.
Alright everyone. Have a great rest of your weekend. Stay cautious when taking trades during this earnings season. Until these indexes can break free one way or the other from the July consolidation and then confirm that move in that direction, you need to keep a high amount of cash on hand, not trade at all, or focus on very short-term daytrading methodologies that continue to perform better than the intermediate to long-term trend following methodologies. As long as QE remains in effect, EOD trend following is going to remain more difficult to operate than not. Thank you. Aloha!
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE OUR SIGNAL DATE – DATE OF SIGNAL
VIPS long – 496% – 7/17/13
HEES long – 217% – 9/4/12
AER long – 158% – 6/27/13
WDC long – 126% – 1/9/13
TPL long – 98% – 10/22/13
USCR long – 82% – 4/12/13
XEC long – 27% – 3/18/14
EOG long – 27% – 2/24/14
