Testing the Waters
The US Indices still don't look good, but some stocks are potentially worth having a shot at here
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The SPY, QQQ and IWM are all still under their declining 20 and 50 day simple moving averages & perhaps even more worryingly under their 200 day SMA, with quite a lot of potential overhead supply. The fact that we’ve only had such a meager bounce off the March 13 low, and have spent 2 weeks under the 200 day SMA, is a little concerning. Also the fact we didn’t have a large capitulation and reversal day, has me thinking we may see a lower low or at least a retest of the March 13th low in the indices.
Here’s a look at the SPY:
QQQ:
And by far the worst of the three, the IWM:
There are however some individual stocks that have held up much better than the index ETFs. During a pullback or correction, stocks that show relative strength (and aren’t defensive stocks, like consumer staples etc.) are more likely to perform better when and if the overall market headwinds subside.
Below are the stocks I am looking at as good potential swing trade candidates to test the waters. Given the overall negative environment I will only be taking small starter positions. For me that is usually risking 0.5% or less of my account per trade. If they start working and I get traction, I will raise my stop losses and add exposure. If not, it’s time to sit on my hands again.
Firstly Spotify (SPOT):
Despite selling off sharply between March 3-10, it recovered quickly and is trading above both its 20 and 50 day SMAs and the AVWAP from the all time high. It also stayed comfortably above its 200 day SMA during the selloff.
Since I live in Australia I can’t put on trades live during US market hours (unless I want to stay up half the night). The pre-market price is currently $616, so I won’t place a buy stop order, as I don’t want to get filled in the 600s. I will place a limit order under the current price (Friday’s closing price was $599.94) at $582, with a stop loss at $554.50 and a tentative target of $650, with the possibility of raising my stop loss and trying to let it run to $700-750 if it gets through $650 and is acting well. Obviously it might run away from here anyway and I never get filled, but that’s OK with me. I would rather miss a trade than chase. If I don’t get filled overnight I will reassess whether to leave the resting order or cancel it, depending on the price action.
Second is Netflix (NFLX):
Netflix also sold off sharply between March 5-10, filling the earning gap from Jan 21/22, but has also recovered quickly and is now above its 20 and 50 day SMAs and the AVWAP from the all time high. I will place a buy limit order at $943, with a stop loss at $908 and a tentative target at $1050.
Lastly Palantir (PLTR):
This is a similar setup to the others. It sold off sharply between March 3-10, undercutting the 50 day SMA, but has recovered and reclaimed the 20 and 50 day SMAs and the AVWAP from the all time high (just). I will place a buy limit order at $86, with a stop loss at $79.5 and a tentative target at $118.
These 3 trades, if they trigger, are all likely to succeed or fail together. They were all leading stocks, recently making all time highs, and are quite volatile, with high ATRs, especially given they aren’t small companies. Therefore I am only taking small positions, risking 0.5% of my account on each trade. If the market does bounce from here, these 3 stocks should quickly approach their prior peaks. They were market leaders, and all actually bottomed a few days before the indices (March 10th vs 13th). They have also all recovered well since they bottomed on March 10. However if the indices roll over and have another leg down from here, I will be stopped out of these positions very quickly, but that in itself is valuable information that more patience will be required.
Hope everyone has a great week!
Cheers!
Marcus Grant, CFTe
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