Right now, my motives behind desiring a pullback in stocks are twofold.
First, my well documented foray into $QQQ puts has me more agitated than normal.
I ask myself if the grief is worth it…but there are times when you have to have some fucking conviction and go for it…and that’s what I’m doing. I calculated the risk I was willing to take on, I was too soon to the party and maxed out my buying prematurely.
This position has become ‘prohibitively large’ and, even though today was, IMO, the sweetest of the sweet spot, I felt it would be fairly irresponsible to add to this position.
In retrospect, I made a mistake in not taking into account the 200 day moving average. traderstewie mentioned it’s presence this morning and, I was like: “holy shit, this looks clear as day”. So for the rest of the day, I just kept an eye on this level, and will continue to do so. The longer we drift sideways, the less conviction I will have.
I have a developing theory about this “sugarplum fairy” rally, but I’m going to keep it to myself for the time being…I have enough of my dick swinging in the breeze, I see no need to throw additional tinder on the fire.
Second: there are very few attractive long setups offering quality entry points. For the most part, shit-ass stocks have led the parade upward…and I’m not really sure that’s a good thing.
Nevertheless, there are a number of stocks that possess strong fundamentals and have also pulled back anywhere from 10-40% from 52-week highs. I feel that we are in desperate need of a pullback in the market to provide some higher probability entry points.
I hate to see large-bodied candles at the bottom of formations. I like calm indecision, I like support at meaningful points. An 800 point drop, followed by a 500 point rally…in 3 weeks…is not what I consider “calm indecision”.
Now, if/when the pullback comes, I’m interested in several areas on the $SPY. First is the gap around 139.5-6, then 138, then the most recent lows under 135.
I’m going to look to be an aggressive buyer of both stocks for longer-term swing trades as well as index ETF call options.
I want to talk now about the stocks that I’m going to consider for those longer-term trades. I mentioned in a post the other day, how I use a screen in The PPT to provide a starting point. From that post:
I use The PPT for my data collection here, screening for price behavior and a few fundamental data points (quarterly rev growth > 5%, ROE > 5% [I would prefer more on both, but I use these numbers as a baseline] and a “fundamental score” > 3.5). My screening criteria includes stocks that are up >20% in a year, are between +5% and -5% for the week, and are -5% for the month. Throw in a minimum market cap (100M), mix in a minimum average daily volume (100k)
Once I have these results, my goal is to visually screen out stocks that I would consider to be in a more ‘perilous’ state.
I accomplish this through the use of a weekly chart adorned with simple moving averages…I use a 4-week, a 13-week and a 26-week. Based on their orientation, I’m able to remove stocks that, on a longer-term time frame, are underperforming.
Now, trading stocks that are down on their luck may be your thing, but when I’m going long, I have historically had much greater success trading stocks that are in a well defined uptrend.
How do I define “uptrend” you query?
It’s pretty simple really, I want the 4 and 13 week (monthly and quarterly) averages to be above the 26 week (bi-yearly). (The orientation of the 4 & 13 aren’t as important, but I’m more likely to find a pattern that I like when the 4 has dipped under the 13). I also want to see a positive slope on the 26 week.
In this process, I don’t care about closing prices…I’m merely whittling away stocks that are going to waste my time. Here is an example of a stock that would make it to the “money round” (click on the table to enlarge):
Using this strategy, I want to build a list of stocks before the market comes in a bit. (If) When that happens I want to be prepared to strike.
That should be enough to chew on for one night.
My best to you all.
-EM
