CURRENT MARKET TRENDS

The long term, intermediate term and short term trends are all up.

STOCK MARKET WEEKLY COMMENTARY

We made new all time highs in the Nasdaq Composite, Nasdaq 100  and Russell 2000 this week.  The S&P 500 and Dow Industrials came within a whisker of new highs, while the Dow Transports continue to lag.

The economy is basically in a sweet spot as far as the market is concerned…not too hot and not too cold.  The 1st Quarter GDP figure released this week indicated just 0.7% expansion in the quarter.  This coming on the heels of a weak employment report a few weeks ago will put no pressure on the Fed to hike rates any time soon.

The all time high figures in the Nasdaq are being driven of course by the likes of Amazon and Facebook, but there are plenty of other stocks making big moves to the upside as well, many of which we have been following for a while.

With all this said, there is no need to be overly cautious at this point.  Enjoy the good times while they are here.  The market will provide plenty of warning signs ahead of any significant corrections.

 

NEW OPPORTUNITIES

We have the following trading opportunities for Monday, May 1st

GALT – We want to buy this stock on a breakout above $3.70.  The stock broke out to a new 52 week high on high volume a couple weeks ago and has consolidated nicely since.  The initial stop should be placed at about $3.18.  Given the chart structure, it may be a few days until this breakout occurs, if one is due.  See the chart below.

 

EXISTING “POSITIONS”

SODA (initial buy at $33.70, current price $54.39) is consolidating recent gains.  Our current exit signals include any breakout below $49.10 and then $48.00.  A breakout below $48.00 should have you out of the stock entirely.

PME (initial buy at $3.34, current price $4.77) is still consolidating.  You’ll want to exit 50% of the position below $4.17 and if there is a breakout below $3.76, exit all or the remaining position.

UCTT (initial buy at $11.91, current price $19.24) was one of the star performers this past week, and will likely need to consolidate at these higher levels.  We now have a nice trend line serving as our initial trailing stop, but the initial exit is well below current levels at $15.50.  You’ll want to exit part of the position there, and the balance on a break below $14.80.

IVAC (initial buy at $9.30, current price $12.75) was a disappointment this week after an upside breakout on Monday took the stock up to $14.  Those gains were short-lived as the stock pulled back the rest of the week.  You’ll want to exit part of the position below $12.45 and the balance on a break below $11.50 or a close below $11.75.

SXE (initial buy at $2.31, current price $4.21) has pulled back to near its trend line and now may be poised to push higher.  Take partial profits on a break below $3.80 and close out the balance on any close below $3.60.

EVRI (initial buy at $4.31, current price $6.35) had a nice week, but our trailing stops remain unchanged.  The closest swing low is at $4.66, so we’ll want to exit a portion of the position on a break below that level.  Any remaining position should be exited on a close below $4.09.

SHOP (initial buy at $48.18, current price $75.95) closed the week with a small loss after a nice rebound on Friday.  A new high from here will allow us to tighten stops further.  At this point, you’ll want to exit all of the position on a break below $67.00.

BWEN (initial buy at $6.52, today’s close $9.19) rallied to close at a new weekly high close, and is sitting just below its recent highs.  As a result of a new high price on Thursday, we are able to raise a stop to $7.60 where you would want to exit part of the position.  You’ll want to exit the balance on a break below $7.05.

EXAS (Initial Buy at $24.60, today’s close $30.01) will likely consolidate for a bit after Thursday’s huge move, which finally gave our position some gains after a frustrating week since our entry.  Our initial stop loss remains as our only exit strategy…that level is $22.70.

AXON (initial buy at $19.95, today’s close at $24.24) continued to rally this week and is due for a pullback.  Our initial stop loss remains as our only exit strategy…that level is $17.75.

 

THIS WEEK’S TRADING LESSON – Risk of Ruin

This week I want to talk about the concept of risk of ruin.  Risk of ruin is one of the key considerations of professional traders when they develop trading strategies.

In gambling, risk of ruin refers to the possibility that you will lose all of your money due to a string of losses.  Suppose, for example, we are playing a coin flip game where every time we flip heads we win $2 for every $1 bet, and every time we flip tails, we lose $1.   The odds suggest that after four flips, we should be up $2, because we should have two winning flips and two losing flips.  With that in mind, if you had $10 in your pocket, how much would you bet on each flip?

Even though the odds of the game are in our favor, there is still a chance we can lose all of our money.  For instance, if you had $10 and bet $5 each time, you only need to lose on your first two flips and you are out of money.  In fact, there is actually a 25% probability of this happening on your first two flips.

It should be noted that the larger the bet size, the greater the risk of ruin.  In fact, risk of ruin increases disproportionately to the increase in bet size.   For instance, doubling the size of the bet will not just double the risk of ruin…it will increase the risk by triple, quadruple or even more, depending upon the particulars of the game or system being played.

Trading legend Monroe Trout was one of the most risk-averse traders in the world of futures trading.  The main reason Trout was such a legend was that he was able to generate substantial returns with very little volatility.

The reason his funds experienced such low volatility was because he was not willing to risk nearly as much of his equity on any given trade compared to most other professional traders.  Trout employed far less leverage in his trading because he discovered that the risk of a black swan type of event, such as the 2008 financial crisis, was much greater than what most people thought.

This is why it is critical that you never risk too much of your equity on any given trade.  You just never know when a poor earnings report or other news event may have a substantial negative impact on any one of your trading positions.

QUOTE OF THE WEEK

“I began to realize that the big money must necessarily be in the big swing.”  Jesse Livermore