“Buy the Good; Sell the Bad; Short the Ugly”


“Buy the Good; Sell the Bad; Short the Ugly”- this sounds obvious to even the most inexperienced trader – but the problem lies in defining which stocks should be labelled as good, bad and ugly.

Most importantly Rule #57 addresses the one basic concept you must master to succeed in the market – “identifying risk and reward.”

First – you need to always trade with the market overall – if the market is in an uptrend then you need to be long the strongest stocks – ones that are above the Bollinger Band (BB) where the angle has been firmly established as going higher. If the market is going down you need to be short stocks that have just the opposite chart pattern – and never trade stocks that are shuffling back in forth without a clear pattern – that’s just gambling. In short – always trade with a stock’s bias – never against it – the trend is your friend – I’m sure this is advice you’ve all heard before and mostly follow – right?

A recent example of this concept is PCLN – a stock that had a climactic run from 2/5/14 to 3/6/14 when it gained $275 in 22 trading days. Knowing that it had made a climactic run I knew that the top was in and it would eventually be due for a climactic decline. When it made its run it had all the elements of a “Good” stock and of course should have been owned and not shorted because of the odds.

PCLN’s ER on 8/8/14 came as the stock was making its fourth break above the BB counting the climactic run – I had my suspicions at this point and posted that the stock would probably trade flat post the report. The reason for this was Rule #17 – but I couldn’t short it until a strength divergence occurred and it broke under the BB again.

When the stock slipped back inside the BB on 8/15 – if I had owned the stock – I would have sold it there – that was the point where it failed and became a “Bad” stock & needed to be sold and left alone because it was giving you too many chances to buy it at the same level on the fourth run higher.

So I waited until it came under the BB for the fourth time since its top on 3/6/14 – which also coincided with the coming weakness that I anticipated in the QQQ.

You need the market with you to make a sustained run in either direction and you need caution or disbelief that such a run can’t occur in a particular stock along with the technical tools to time the trade. PCLN had all of the elements of an “Ugly” stock when it broke under the BB on 8/28 at the same time the QQQ were reaching up near its recent high.

The divergence in strength from the QQQ and many other factors like Rule #17 gave me the green light to short the stock at that point – and when the QQQ stalled for several days near its high and PCLN increased its divergence I knew we had good odds for a big winner.

On 9/9 I posted on ST that we sure were getting a lot of opportunities to buy the QQQ near $100 – always a bad sign when the deck gets shuffled over and over again and the same card keeps coming up on top – probably either need a new dealer or new deck. Good opportunities don’t normally keep offering themselves up – do they?

Even though the QQQ has since turned much lower – down 6% – PCLN has decreased 19% from where I first shorted it making it one of the biggest losers in this down market. Currently PCLN probably has some more downside here – but don’t be surprised if it decides to shake a few weak shorts off first because the trade has become fairly obvious. I have a good idea of where it’s going and when it will get there – but I’m out of the trade as of Friday because the odds have decreased for the immediate few days ahead and it may need time for the QQQ to catch up before it once again creates another divergence in strength. But whatever you do don’t try and catch this falling knife there until I tell you that it is ready.

Another stock to take note of over the last month is NFLX – because of its positioning I knew to leave it alone. Due to other key factors in its chart pattern that I haven’t discussed here – I also knew it would provide me low odds in a trade for either direction over the last couple of weeks. Its ER is on Wednesday and I see a possible trade there if we get a somewhat muted response to earnings – so don’t waste your money on inflated premiums because your odds are very low. Last year I gave you the trade that PCLN would exeed $1,000 – at the time of my call the stock traded at $660 – well NFLX has the same potential as PCLN did – but it needs to make it through this market downturn and its ER before I can make a targeted call. No absolute prediction there yet because I don’t see the odds for a good bet prior to its ER – so let’s keep it close on your radar and keep some powder dry for a possible big winner.

APPL is in a similar holding pattern here as well – but I see an opposite direction trade for it possibly setting up. Again – the elements for a trade one way or the other are still not there yet for me – so I am leaving it alone until I can trade it with better odds.

About a month ago I mentioned that we could have weakness thru 9/26 and when we stalled without much of a pullback I extended the timeframe to 10/10. To make these macro calls I have no crystal ball – instead rely on detailed charts that create support and resistance convergences along with some other unique tools to determine general direction and timing.

So what does this next week have in store for the market? Well – you can’t buy the market here even though strong rallies are possible – you have to trade with the trend which is clearly down for everything – even though the QQQ still hasn’t reached a negative level on the Stochastic you have to remain short or neutral. If the QQQ were to rally here and exceed the top of the BB there is only one strong level of resistance left before it could reach near $140. You need to keep that in mind.

Given all of my data my best “guess” here is that we do go down more next week and the QQQ will test near $89 – there is absolute support there – but absolute support needs to be tested to the penny and can’t be gapped or it will lose its strength.

Do I think we’re going into a new Bear Market? No – but the charts could quickly change my mind. This selloff seems too slow and too obvious for me to believe it will last much longer – but I do think it will do enough damage to shake out some of the weak longs and then recover fast – fast enough to leave many chartless traders behind.

I’ll let you know what my thoughts are during the week – but for now my best “guess” based on convergences would be that we bottom near Thursday and then reverse hard unless we gap that QQQ support @ $89. Just speculating – but we might get some monetary policy announcement Thursday of sorts based loosely on certain charts. Maybe a raise in rates where you “buy the news event” is possible here – just be aware.

Note – don’t short GLD here and don’t buy any of the defenses – it’s too late in my opinion and there will be some carnage there in the near future if my charts are correct. The GLD hit some second test support on 10/3 – so when it opened above that support (didn’t gap below it) on 10/4 I immediately posted not to short it. I bought it for a trade and exited when it closed above absolute support back inside the BB. GLD is tricky right here – it has teased good support before in recent months but always gapped below it – this time may be different because #17 is once again back in play. This is not a place for you to play without perfect charts in my opinion – so just be aware GLD could go hard either way by the end of this week.

Keep in mind that I haven’t seen the futures for Monday and may change my mind completely regarding everything I say here if we have a huge gap in either direction – but in general here you need to realize Rule #7 “The charts precede the news”. Using this rule you should factor in that all of the news were now receiving has already been digested by the market – it the unknowns that could take the market lower or higher – so reading the headlines and trading based on them is a loser every time. Just remember that 90% of the 9/11 correction came prior to the event – that alone should tell you not to trade the headlines at least in a concurrent direction.

Also – just going flat in these corrections is not a bad move – I never trade heavy short because the market has a natural bias to the upside which reduces your odds at the onset – plus factoring the element of speed that down moves have – makes timing them very difficult even for the best of us. Simply preserving your capital here might be wise if we’re only going lower for 4-5% more.

And – one scenario that no one anticipates here is the “shuffle” – where we pulse up and down at our current level for positioning and then experience an ugly 4-5% down day that finishes near the low. Then we gap up the following day with a strong reversal that sticks. This just might be the one set-up that is the hardest to trade – and if it happens Thursday-Friday would be perfect two days because holding into the weekend would be difficult and another large gap open on Monday would leave a lot of people out at much lower levels. This is how good traders think/anticipate set-ups using their charts to mark support and resistance for such patterns to develop. In addition the one thing that leads me to keep this possibility in mind most here is the fact that the QQQ hasn’t closed under the 20% level on the Stochastic. If the long-term trend on the QQQ Stochastic drifts upwards during a shuffle then this set-up becomes even more likely.

Remember – down market moves are based in large part on Rule #51 “Markets hurt the most the most”- so please make wise decisions here that are your own decisions.

I’ve given you a lot here to digest so if you need more clarity please follow me on Stock Twits or Twitter and send me a message – there are no stupid questions – so ask whatever you want – if you would like for me to follow you back just let me know – because I always prefer to Direct Message (DM) as much as possible.

One last thing – ST is a tool – if I DM you my advice you can take it to the bank – but “public post” on ST (not from me so much) often have alternative motives that you may not understand – so just be aware –

As always – study more than you trade and you will succeed – good luck – PTP –

 

 

 

 

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