The Big Wave Trading portfolio model remains under a market-wide operational BUY signal. The past week saw the Nasdaq and Russell 2000 consolidate its gains remarkably well, while the S&P and DJIA related indexes continued to hit new highs. This strength is very impressive, considering the market is in overbought conditions on quite a few oscillators that we follow. Continued new highs in overbought conditions is always an overall positive condition for major market indexes and suggest that with timely backing and filling more highs should continue. It is when we continue to hit new highs and see major internal divergences that problems occur. So far we do not see these divergences.
While we are a tad disappointed that the rally just keep V-ramping higher which does not allow the proper sound consolidation patterns that give us clear buy signals that allows us to really take size in stocks we want to be very long, it is still producing plenty of long signals. Like I just stated, though, we are continuing our safe investing/trading methodology in regards to position sizes. This is due to the lack (there are almost zero) perfectly setup consolidation patterns in high quality leading stocks. We have a ton of good to really good patterns that we are buying or ready to buy. But none of these, once again (same story all year long), is really impressing us.
However, we are getting signals and we are now nearly 75% invested in this market. We continue to look for a consolidation period that will hopefully spring to life more tight consolidation areas but the past week has helped with the Nasdaq and Russell 2000 consolidating there moves. There are many stocks we have on watch that are forming tight consolidation patterns that we have set Buy Stop orders and/or are ready to set Buy Stop orders (STRT, PANW, TASR, EEFT, RWLK, FLT…). Even if the market does not pullback we have enough potential breakout candidates that we will be fully invested if the Nasdaq and Russell 2000 breaks out of their current week long consolidation. If you would like to occasionally see a list of stocks we are stalking along with commentary in regards to these potential trades, make sure you follow us on Stocktwits, Twitter and Facebook.
The biggest difference this time around for us, due to that V-shaped insanity we just saw down and up is that we are constantly adjusting our Sell Stops higher. We always have emergency Sell Stops on the book but we normally do not adjust them higher when we see a stock we are long act funny. This is no longer the case at this point in the rally. While we may blast off higher into the end of the year, it is still extremely risky out there with many stocks getting destroyed very quickly in just one after-hours session.
In fact, we almost got caught in SLXP. SLXP gave us a “confirmation of a potential bottom” signal on 10/30. We poked a position. On 11/4 our Stop was hit. We were out. On an EOD signal basis alone we would have still been long as the stock failed to close below the open or LOD of the signal date. That official EOD sell signal did not come until the close on 11/6. If we would not have had our hard Sell Stops on the books, we would have been caught. This is a clear example of why Sell Stops are necessary in a market like this.
Now with the above cautionary lesson, you might ask, “why did you go long before earnings?” First off, we knew that earnings were due and that the trade overall was dangerous ahead of earnings. Second, we positioned size accordingly due to this. Third, we had our hard Sell Stops on the books and our methodology would have dictated that we were out of at least 75% of the position ahead of earnings. If a stock we are long does not act right immediately ahead of earnings, we start selling. If the stock acts perfect, we hold into earnings with Sell Stops. If the stock is acting well but has a bad day 2-3 days before earnings, we get out of most of our position. We are always aware of earnings and strive to never lose any money when we are wrong ahead of earnings.
Our first rule remains to always cut your losses short. We simply can not stand losing money. We hate losing money more than we enjoy making money. This is why our Risk-of-Ruin rate is below 1%. It’s impossible. It would take an asteroid destroying the Earth to change this. Our second rule is to always remember the first rule. This rule, however, interchanges with the other first rule which is NEVER FIGHT THE FED. Ever!
While many traders completely sold out during the pullback and scrambled to get back long you can see below that we remained disciplined with our signals and that is why we are still holding onto some stocks with some impressive capital gains. AGIO was disappointing this week and we will be forced to take some of our profits on Monday but the uptrend and trailing ATRs are not broken yet.
I hope everyone has an amazingly profitable upcoming week. Mahalo for reading. Aloha.
Top Current Holdings – Percent Gain – Date of Signal
VIPS long – 400% – 7/17/13
OVAS long – 115% – 8/8/14
VDSI long – 87% – 8/4/14
AGIO long – 43% – 9/24/14
RENT long – 40% – 9/24/14
