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SP 500 UPDATE, ATTACK CAPITAL PLANNING, AND STOCK IDEAS!
Another volatile week just went by but importantly for now the SP 500 climbed back past the 2035 resistance line we had some concerns with. Our trading ranges were pointed out to SRP members as 1985-2035, above bullish and below bearish. The ECB kicked a bond buying program into gear effectively on Thursday that was more than expected, enough to push the market to 2061. We did pull back on Friday though, so expect continuing volatility ahead.
To wit, the SP 500 is only up about 3% in the last 6-7 months from July highs. We obviously are in a resting period for the bull market and in a trading range. This causes frustrating at times as you can see certain stocks or sectors soaring out of the blue like the Airlines this past week, and others dropping hard and then rallying a week or two later. (Chip stocks a few times, Biotech etc). This makes for difficult trading and even investing or position trading environments. Sometimes, all of the positions you are holding or SRP is recommending and covering are in consolidations with no real net movement. The 5% up move that looks poised to break out, then turns right back down causing more frustration. You expect to hold for the breakout that looks obvious on the charts (HOLI), and then you get slapped upside the head with a decline on no news out of nowwhere. This is the environment we are dealing with right now, so getting Alpha is the key… and also difficult of course.
It is key during these periods of market consolidation to take profits a little faster on swing positions as your 5-8% gain can disappear quickly and breakouts are few and far between. It is also though a good time to use the downside volatility to your advantage with Attack Capital.
ATTACK CAPITAL AND CLDN SAMPLE:
We used some Attack Capital this week at the firm when CLDN dropped once again out of the blue from $18 early in the week to as low as $15.81 on Thursday. Our opinion is we have done the research, we have evaluated the opportunities, balance sheet, share structure, catalysts, management and more. So often you will get these downdrafts that come out of the blue, a waterfall type move over 1 or 2 days. It can happen at anytime with almost any stock in the universe. We always have attack capital (cash) ready to deploy aggressively when we see these anomolies. When CLDN dropped again this week we bought from 17-17.40, then 16-16.40, and then more at 16.73 over a few days. We bought as low as 15.98 and saw 17.20 just 2 trading days later for a 7-8% swing. The bank doesnt pay you 7% in a few days right? So the way we look at big downdrafts in our favorite names is an opportunity to make some interest on our attack capital.
Attack Capital Planning:
Mentally we have an image in our mind that as we are adding and (in this case CLDN, the stock, is declining to 17, 16.80, 16.50, 16.30, 16.10 and so forth)… that we are going to earn interest on every dollar we use to buy more stock during that waterfall decline. This is literally how we look at it in our minds so as to have the fortitude to attack wth our cash, and not hide in a bunker or under a desk. We assume the stock will head back up at some point from the senseless decline and pay us interest for having the strength to buy. Most waterfall declines are computer generated stop loss selling, margin calls, more stop loss selling, then panic selling by traders. Use it to your advantage, don’t panic…
We also respect the market and do not pretend we are going to pick the exact bottom and plow one big trade of cash in at just the right price. That is not a risk reward metric that works in the market, because most often you will have put your attack capital in all at once, and had you waited one more day you could have picked up more shares much cheaper. When you use attack capital, scale in over many trades over 1-2 days on a decline, never pretend you are smarter than the market or the computers and you can pick the bottom, its not going to happen that often. Worst case you only got a small amount and the stock heads back north, best case you get more shares cheaper lowering your average and making more $$ when the stock reverses. This avoids the common mistake of thinking you are smarter than the market and you plan to pick the exact bottom. More often than not a stock in a sell off declines more than you planned or thought it would.
There is nothing wrong with then selling some of your stock you bought with attack capital on the way down when the stock reverses back up and banking the gains while holding a core position. In fact, with core long term positions like we have at SRP, it makes total sense to trade around the position a little bit for best results. If you are skilled at it, you can lower your net cost with your trading and maintain that long position for the upside you are projecting. At our firm, we always look for big declines in our favorite names and then we slowly add to those positions as the stock drops, and we keep on adding and adding a little at a time… try it sometime if you can stomach the drop. Dealing with paper drawdowns is mentally tough, but financially rewarding if you have a plan!
Now on to some ideas for the coming near term environment. We have a list of some stocks that are of interest and may turn into SRP related swing positions or other soon!
XRS- Tal Education Group- K-12 Chinese provider of tutorial and educational services. May finally be coming out of a slumber stock wise. We have covered it at SRP in the past.
IPHI- Semiconductor manufacturer breaking out
PCRX- Pacira Pharmaceuticals, breaking out of a multi month base it looks like. The company’s current emphasis is the development of non-opioid products for postsurgical pain control, and its lead product, EXPAREL, was commercially launched in the United States in April 2012. EXPAREL and two other products have utilized the Pacira proprietary product delivery technology DepoFoam, a unique platform that encapsulates drugs without altering their molecular structure and then releases them over a desired period of time. Some are calling it a miracle drug and delivery system platform. A break over 110 would be pretty bullish long term.
PRXL- A move over 65 would break this one out. We have covered it in the past. a Biopharmaceutical outsourcing services company, provides clinical research, clinical logistics, medical communications, consulting, commercialization, and advanced technology products and services for pharmaceutical, biotechnology, and medical device industries worldwide.
AKRX- Generic Drug maker we have also recently had on weekend lists
RJET (On last weeks list, rallied big with airline stocks)
BIN- Progressive Waste Solutions- New uptrend?
ULTA- Ulta Beauty supply, we profited from this at SRP not long ago in a swing position, looks like a breakout as they expand into more stores nationwide.