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See How We Consistently Help Investors and Traders Become More Profitable - Sample Newsletter View

Published on February 21, 2020 @ 8:13am

A few important lessons to add to your trading and investing arsenals. Major averages stave off 30 minutes of sharp selling yesterday, as the NASDAQ Composite kept the bullish bias intact. However, the increase in volatility this morning may be an early sign of things to come. Deere & Company (DE) beats handily, but we'll remove it from our trading list for the time being and free up a spot - still an excellent long-term idea though. Gold achieves our near-term target, so we'll go ahead and suggest profit taking on our bullish short-term trade in UGLD, but we'll continue to stick with GLD in our long-term ETF holdings, as well as stick with our other metal and basic material plays in SQM and WPM.

Anticipation Vs. Confirmation - Positioning Power - Options Chains Often Don't Suggest What's Really Happening

Before I get into the meat of today's edition, I want to cover a few things I think can help every single trader and investor out there - no matter what your strategy might be. Whether you're looking to learn how these markets actually work, or you're simply looking to expand your already astute knowledge of how these markets work, there's something valuable in every section of today's newsletter to help you accomplish that.

First, I often talk about waiting for confirmation vs. trying to overly anticipate things too much all of the time. One might think those are two in the same when it comes to the equity markets, but there's actually a big difference between the two. Anticipating is jumping on something because of the way something is behaving in a minute or a day, while waiting for confirmation is actually waiting for something technically definitive to confirm itself before making a move.

All too often traders and investors will make knee-jerk decisions, only to end up being whip-sawed very quickly. Will they be right from time-to-time and capture more gains in the process? Sure, but hindsight is always 20/20. The truth is when a trader or investor actually waits for definitive confirmation, they're going to be right far more often than they're wrong. Sure, the more disciplined traders and investors are going to give up some gains sometimes by waiting for confirmation, but in the end they're going to consistently be a LOT more successful.

When it comes to something I call positioning power, I think it's prudent to wait for extremes for the timeframe and instrument in question. Meaning, when we jump the gun too soon (no matter what the chart timeframe in question is), we often can put ourselves in a position that's not optimal.

In other words, when we jump on a short or long trade too soon, and the idea in question moves quickly in the other direction we become trapped. Meaning, now we have to wait and hope for the idea in question to work itself back in the other direction. However, if one waits for an extreme, and then uses disciplined protective stops, they're often going to put themselves in a position of power. And, it's that power that allows them to not only feel more comfortable with the trade in question, but also gives them options.

Don't get me wrong, you could be the best trader or investor on the planet and you're still going to end up in unfavorable positions at times, but that's just one general rule I think everyone should consider before trying to anticipate something too soon.

Lastly, although I'm not a huge fan of options I do want to point out a big misnomer when it comes to the options markets. I see and hear it all of the time in and around the financial media, whereby people say they can tell what's going on with a particular options chain for a company or instrument.

You'll see and hear things like... someone bought a massive number of calls or puts with a strike price of X. However, what nobody really knows is whether or not that call or put purchase is a hedge against a much bigger underlying position - one that's actually meant for the opposite direction. Meaning, if someone buys a large number of puts, many might think that stock is going down when in fact it's merely a hedge against a much bigger bullish position in the stock.

So, just be careful getting sucked into relying too much on how many puts or calls are open or being purchased in an options chain at any given time, and more importantly rely on your charting prowess to determine what a stock is actually in a position to do.

Major Averages Stave Off 30 Minutes of Sharp Selling Yesterday - NASDAQ Composite Saves the Bullish Bias for Now

Yesterday, shortly after the 11:00 EST hour kicked off someone dumped big on the markets for about 20 minutes. The move triggered a sharp move lower, only for the major averages to climb their way back by day's end. This morning, the markets are building on yesterday's increase in volatility.

First, yesterday's sharp move lower in 20 minutes is a perfect example of why stocks take the stair case up and the elevator down. In short, when someone big dumps on a stock, market makers get out of the way, pull their bids, and let the dumping end before they step in and start buying. This triggers a very sharp move lower because traders and market makers don't want to get in the way. Remember what I just said above regarding positioning power? Yesterday was another good example displayed by the market makers.

So, is this the end of the recent bullish thrusting pattern on a short-term basis? It's very possible. Is it the end of the multi-year bull market? I definitely don't think so.

Further expanding on the above regarding confirmation and positioning power, I've been saying for quite some time now these markets should pull back somewhere between 9,800 and 10,100 on the NASDAQ Composite. Well, that appears to be happening now that the NASDAQ achieved the 9,800 level just two days ago.

Provided here are daily charts of both the NASDAQ Composite and the S&P 500 showing you all of the recent activity. I think it goes without saying disciplined short-term traders should have been stopped out of any bullish leveraged index ETFs by now. However, I also don't think anyone should be getting short just yet either - unless you did so around yesterday's highs, either on the open or at the close.

Why? Again, it's all about confirmation and positioning. Meaning, if you're now out of any short-term index trades, you now have the option of waiting for a more optimal short entry, or at the very least wait for an ensuing bottom and get long again from there.

At this point, as ugly as it looks today it's no shoe in that these markets are finally ready to break down for a while. I said a few days ago these markets could enter into a short-term consolidation period - one that actually could end up being nothing more than an attractive bullish breather.

However, the major averages are also now in a position to confirm a much stronger bearish reversal in the days ahead. So, we're basically going to be patient and let these markets confirm something bullish or bearish before making any significant moves on a short-term basis.

Deere & Company (DE) Beats Handily - A Great Long-Term Hold, But Cutting It From Our Short-Term List - Managing Trades and Risk

We got an excellent earnings report this morning from Deere & Company (DE), but we're going to go ahead and remove it from our short-term trading list, lighten the number of current open ideas, and free up a spot. Don't get me wrong, from a buy and hold perspective I do believe DE is an excellent long-term investing idea, but we've given it enough time to perform on a short-term basis, so we're going to suggest short-term traders take the very modest profit and move on.

If we'd have been positioned at lower levels we'd be sticking with it,  however, that clearly wasn't the case with this idea. We were down about 5% heading into today's report and the stock had literally done nothing since suggesting it back in late November. We were plenty patient with DE from a short-term trading perspective, so considering where these markets are now, and how DE has been behaving of late, we're just fine removing the idea from our short-term list for a modest profit.

Again, ex those leveraged ETFs we suggest from time-to-time, we only ever suggest individual companies on a short-term basis we also believe warrant long-term consideration. It's a very consistent part of my methodology here.

However, I'm always trying to help everyone manage portfolio risk, provide short-term traders with attractive ideas, as well as provide the long-term buy and hold investor with the same - all while keeping our number of open individual company short-term trading ideas to a manageable minimum. Meaning, we'll never keep more than about 10-12 open individual company trading ideas on our list at the bottom of the newsletter.

Further, the higher and higher these markets go without any sort of major breathers along the way, it's important we continue to be very selective around current market levels, and keep the number of bullish ideas on a short-term basis to a manageable minimum.

Some might say... well if you like the idea long-term then why cut an idea like DE on a short-term basis? The answer is simple. The short-term trading strategy is far different than the long-term investing strategy, which is why everyone should know their strategy and decide how you're going to play something well in advance of buying it.

In other words, if it's a great company and you're a long-term investor you simply stay the course until a point in time we believe this multi-year bull market is over for at least a year or so. However, if you decide to trade an idea on a short-term basis, you must remain disciplined in terms of what you're willing to accept as a loss when an idea doesn't work out, and more importantly take the profits when they're there, because when it comes to short-term trading it's all about positioning, clipping gains and preservation of capital.

Gold Achieves Our Short-Term Target - Suggest Profit Taking in UGLD - Still Sticking with GLD, SQM and WPM

Speaking of the above, gold has finally achieved our short-term target of $153 on GLD, the primary non-leveraged ETF tracking the price of gold. Therefore, we're going to go ahead and suggest taking the roughly 25% profits in UGLD.

Back on December 27th, when we suggested entering UGLD, the bullish leveraged ETF tracking gold was around the $139 and change level. This morning, it's around the $174 level. That's about a 25% gain from there to here. That's good enough, so we'll suggest taking the profits in this swing trade.

However, we are going to continue to stick with GLD on our long-term ETF holdings list below, as well as SQM and WPM (two open basic materials and metals individual company trading ideas right now) - not just for market hedges, but also in anticipation of higher levels down the road. Specifically, if gold can continue to find strength the next stop for GLD should be somewhere around the $168 level, which represents another key retracement level to the upside.

I just think gold could pull back before potentially moving higher - hence why we're going to go ahead and cut UGLD for the time being. One in the hand is better than two in the bush when it comes to leveraged ETFs - especially with a bit of a suspect near-term market landscape.

The bottom line is yesterday we suggested profit taking in UCO, the primary bullish leveraged ETF tracking the price of oil, as well as UGLD, the primary bullish leveraged ETF tracking gold. We recently also suggested profit taking in our previously suggested Bitcoin ETF trade via GBTC, so as you can see we now have no open leveraged ETF trading ideas tracking any commodity, precious metal or currency.

Again, we're lightening the exposure more and more right now, as I want to see what develops in and around the entire market landscape over the next several days and beyond. We'll continue to selectively add new ideas when we think the time is right, but right now I think it's prudent to take a bit of a wait and see approach for the time being with many of the leveraged ETFs out there right now.

Current Stance for Equities:

Long-Term Bullish - Short-Term Bullish

Suggested Long-Term ETF Holdings:

Invesco QQQ Trust (QQQ) - 20%

SPDR S&P 500 ETF (SPY) - 20%

iShares Russell 2000 ETF (IWM) - 5%

Vanguard Consumer Staples Index Fund ETF Shares (VDC) - 5%

SPDR S&P Oil & Gas Equipment & Services ETF (XES) - 5%

iShares MSCI ACWI ETF (ACWI) - 5%

SPDR Gold Shares (GLD) - 10%

ARK Autonomous Technology & Robotics ETF (ARKQ) - 10%

Individual Company Trading Ideas:

Wheaton Precious Metals Corp. (WPM) - Suggested 2/20/2020 @ $32.10

Sociedad Quimica y Minera de Chile S.A. (SQM) - Suggested 2/12/2020 @ $31.11

Owens & Minor, Inc. (OMI) - Suggested 1/28/2020 @ $6.73

Akoustis Technologies, Inc. (AKTS) - Suggested 1/8/2020 @ $8.71

Kratos Defense & Security Solutions, Inc. (KTOS) - Suggested 1/6/2020 @ $20.11

Freeport-McMoRan Inc. (FCX) - Suggested 12/12/2019 @ 13.01

The Walt Disney Company (DIS) - Suggested 12/11/2019 @ $147.58

Bausch Health Companies Inc. (BHC) - Suggested 12/6/2019 @ $28.86

Scientific Games Corporation (SGMS) - Suggested 12/05/2019 @ $27.02

Important Strategy Tips On Trading, Investing, Portfolio Management and Using Our Service

Very important for any trader and investor who wants to be successful. To review a list of rules and disciplines to consider go here: It's a good idea to review this article from time-to-time for any newly added rules.

To view our current trading ideas log-in here: If you have any questions regarding a specific stock - even if it's something we haven't suggested - you can reply directly to this email, or call us at 619-369-9316.

John Monroe - Senior Editor and Analyst