Analysis, Perspective, Trading Strategy
At the Edge of Chaos: When the Wall of Worry Seems Insurmountable, Ask a Simple Question: Do you want to be Right? Or do you want to make Money?
Duarte in the Money Options
technician and collaborator of the late Marty Zweig, Ned Davis, is known
for asking the question “Do you want to be right? Or do you want to make
money?” And as crass and cynical as the words may sound to the uninitiated,
truer words were never spoken in the context of being a stock trader.
Please don’t misunderstand me. I am as concerned as anyone about
the state of the world. It’s impossible not to be when the daily news
feature a pandemic, riots in the streets of major U.S. cities, and
a raging political landscape, both internationally and domestically.
Yet, even in these uncertain times there are still plenty of individual
stocks with very attractive chart patterns and positive money flows.
Moreover, based on the general state of life in the world at the moment
the bears could easily justify their negative views on the markets,
if they only focused on the news.
On the other hand, as I will detail below, purely from a trading
standpoint, it’s hard to be bearish if you look at the technical landscape
in the markets. Clearly we are in uncharted waters as institutional
investors have reportedly missed the rally off of the recent bottom
and are now wondering if they should play catch up to retail investors
who seemingly have taken over the market. And yes, the market could
theoretically crash and burn at any moment. But is that possibility
any higher today than on any other day?
Furthermore, when it comes down to making trading decisions, the
number one historically proven external factor which affects stock
prices the most remains the actions of the Federal Reserve. And unless
I’m wrong, as quarterly statement time gets closer and money managers
have to justify their jobs, the odds of the pros moving into the market
are likely to rise. What that means is that June, the last month in
the quarter may not be too bad for the market as under pressure money
managers move money into stocks in order to dress up their books and
work on their bonuses. Of course, that means July could get interesting,
but that’s not here yet, so we’ll worry about it then.
Certainly, we should not be cavalier. There are plenty of valid arguments
as to why there may be a bad outcome down the road in response to the
Fed’s massive easing over the last few weeks. And when I look at life
outside the markets I am as concerned about them as any person who
is aware of what may happen in the future as the debt fueled economy
and the global order which it has fueled finally decides to have a
But, we’ve known about budget deficits and rising sovereign debt
for years. The political landscape has been raging and ragged for at
least a generation now.
Frankly, the more we hear and talk about all these things, the higher
the stock market seems to go. All of which suggests that, until proven
otherwise, stock prices, especially in the era of trading algorithms,
are mostly influenced by the action of global central banks. And at
the moment, the central banks, especially the Fed are still more than
willing to finance the world’s problems in hopes that if they throw
enough money at them they will go away.
Does that mean that they are right? I frankly don’t know. Do we act
irresponsibly and throw caution to the wind? Of course not; we trade
responsibly, with careful money management techniques, and the prudent
use of sell stops. But what it does mean is that from a trading standpoint,
we should focus on our individual stock positions and how they react
to whatever is happening inside and outside the market.
For an in depth look at how I got here and how I analyze the markets
check out my May 25, 2020 interview with Stockcharts.com’s David Keller
on his show “Behind the Charts” on StockchartsTV.
To subscribe to my service, click here.
Copart Cops Chart Breakout as Management Hits Leadership
Copart (NSDQ: CPRT) is one of those companies whose business segment,
brokering used car parts between body shops, insurance companies, and
other interested parties is not at the top of anyone’s glamour list.
Yet, the stock has proven to be a standout in the post COVID-19 rally.
Moreover, if you read the company’s most recent earnings call you
get a feel for a management team whose crisis management skills show
why the company continues to lead its sector and why they are likely
to survive this and many crises. Without making this an encyclopedia
length article, I’d just like to point out that when the COVID-19 situation
broke out, CPRT’s management team was all over it. First of all, they
reassured their workers that no one was going to lose their job. Next,
they drew their entire credit line and positioned themselves to stay
in business. Then, they proved themselves to be essential by noting
to law enforcement that if they didn’t pick up the crashed cars dotting
the landscape after accidents and do their job then who would?
As a result, the company stayed in business with little change in
their financial or business structure, and the chart proves it as the
stock just broke above its 200-day moving average and is putting on
the afterburners. At this point, it’s quite plausible to see the stock
move back toward its pre-COVID-19 high, given its positive momentum.
For an in depth look at how I analyze the markets check out my May
25, 2020 interview with Stockcharts.com’s David Keller on his show
“Behind the Charts” on StockchartsTV.
For air time and details click here.
And if you’re not a subscriber yet, check out our Free Trial information here.
NYAD Holds near Breakout
The New York Stock Exchange Advance Decline line (NYAD) delivered
a midweek chart breakout, and held close to this positive level as
the week ended, a fact that suggests that the most likely outcome for
this market, barring a complete reversal, remains one of higher stock
prices. Furthermore, NYAD now has increased its bullish profile as
- Made two new highs during the most recent trading week
- Rises in a higher high and higher low daily pattern
- Trades above its 20, 50, and 200 day moving averages
- Has positive momentum due to RSI being well above the zero line
- Features RSI which remains below 70, a sign that the uptrend is
still not overbought
Perhaps, the most overlooked positive sign in the market is that
despite the gloom and doom in the air, the S & P 500 (SPX) was
able to close the week above its 200 day moving average fully confirming
that, at least for now, warts and all, the U.S. stock market is, by
definition, back on the bullish side of the trend.
Moreover, the NASDAQ 100 index (NDX) is within striking distance
of its all time high, also confirming the bullish trend.
Therefore, the burden of proof has now fully shifted to the bears.
When you trade, Focus on the Markets
It’s hard to tune out the crazy world we live in, and in our personal
lives it’s not a good idea to ignore the reality of the moment. However,
when we step into the trading room, the best thing to do is to focus
on the price action of the markets and our individual positions.
A perfect example is what happened last week when on Thursday afternoon
the market lost all its gains on a news item suggesting that President
Trump was going to say something that would bring the U.S.-China trade
war back. By Friday, when Trump actually made his statement nothing
of the sort happened and the market moved to new highs.
During this period, there were many stocks which ignored the volatility
of the major indexes. If you panicked and sold stocks that were doing
well, you likely missed them making higher highs on Friday when what
really happened was totally different than what the algos thought they
read in the headlines the day before.
The bottom line is that to trade successfully in this market, it’s
best to keep an eye on how your own positions are doing, as you watch
what the news and the algos do to the indexes. If you’re o.k., there
is no reason to sell into the daily madness. Study your charts. Know
your companies. Mind your sell stops because in the stock market, it’s
always better to make money than to be right.
I own shares in CPRT.
Joe Duarte is a former money manager, an active trader and a widely
recognized independent stock market analyst since 1987. He is author
of eight investment books, including the best sellingTrading
Options for Dummies, rated a TOP
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