Trading Lesson of the Week

• April 28, 2024
• T.CMG | RERE

In This Week’s Issue:

• Market Outlook – Lack of Buyer Enthusiasm
• This Week’s Market Minutes video – Will Inflation Crash the Stock Market
• Trader Training – The Other Side of the Question, Reasons to Say No to a Trade
• Strategy – Stockscores Simple

Market Outlook – Lack of Buyer Enthusiasm

The selling pressure of April subsided last week and most markets were able to break their short term downward trends. That should lead to a recovery of some of the losses that occurred early in the month. However, trading volumes are very light and it seems that the buyers lack motivation. It seems that investors are waiting to see some economic numbers that show a slowing of inflation. They need that to believe that interest rates will start to fall. Essentially, the market we have right now is in limbo. If the US Fed signals a rate decrease, we will have a catalyst to get investors motivate again. Until then, it is only the Alpha stocks that are worth trading, and generally only in the short term.

This Week’s Market Minutes video – Will Inflation Crash the Stock Market?

US Inflation has been stubbornly high and that is starting to drag down the stock market. This week, I look at the two important charts that represent inflation and explain how to tell when inflation expectations are improving. Plus, my analysis of the stock, commodity, currency and bond markets and the trade of the week on ACON.

Click here to watch this week's video

https://youtu.be/dKb_dtG5TnY

Commentary – The Other Side of the Question, Reasons to Say No to a Trade

As investors, our natural inclination is to seek out stocks that have good qualities. We look for reasons to buy the stocks we are considering and often forget to look for the negatives. Since there are thousands of stocks to consider and almost all of them can have some reason for buying them, it may be better to reverse how we approach the analysis of stocks. Looking for reasons not to buy a stock will emphasize a higher standard for the stocks you do buy and will help to improve your overall market performance.

Here is a list of common reasons I use to throw a stock out of consideration:

Too Much Volatility

Volatility is uncertainty. Virtually every good chart pattern that I use to find winners demonstrates a break out from low volatility. The narrower the range before the breakout, the more important the breakout becomes. If the stock's price is moving all over the place before it makes a break through resistance then there is a much greater chance that the breakout is false and will likely fall back. Ignore stocks that have a lot of price volatility before the break out.

Not Enough Reward for the Risk

A stock can go two ways, up or down, after you buy it. If the upside potential is not enough to justify the downside risk, then you should ignore the opportunity. I like stocks to have at least double the upside potential for the downside risk. That way, you don't have to be right even half of the time to make money, provided you are disciplined of course.

Lack of Optimism

Fundamentals do not matter. It is the perception of Fundamentals that matter. If investors are not showing some optimism about a company's prospects then it is likely that they are not paying any attention to the company's fundamentals. Look for rising bottoms on the chart as an indication that investors are optimistic, if there aren't any, leave the stock alone.

No Abnormal Behavior

The stock market is efficient most of the time. That means that you can not expect to consistently beat the stock market because all available information is priced in to the stock and your success at predicting new information can only be random. To beat the market, we have to look for break downs in market efficiency. I find that the best way to do this is look for abnormal behavior in the trading of a stock because it implies that there is significant new information playing a role in the stock's performance. I don't consider any stock that lacks abnormal behavior in its recent trading.

Too Far Up

The higher a stock goes, the riskier it becomes. I don't like to chase stocks higher. If I look at a 6 month chart of a stock and it has made more than two steps up, I don't consider it. A one day run of substantial gains is not a concern; I want to ignore stocks that have been in upward trends for some time. Look for stocks that are breaking from periods of sideways trading, not up trends.

Lack of Liquidity

The more often a stock trades, the easier it is to get in and out of it. Stocks that are not actively traded tend to have wider spreads between their bids and asks and it can be difficult to move in and out of the stock. Don't consider stocks that don't trade every day and they should trade at least 50 times a day but more is better.

Mixed Messages

I always try to look at a stock's chart on more than one time frame. If the message is not the same on both charts, I leave them alone. When day trading, look at the daily and intraday charts. When position trading, look at the daily and weekly charts.

Any time you think a stock has great potential, give this list a look and see if any of these factors show up. If so, it may be a good idea to move on and look for something else.