Stocks Only Go Up.
Weekly Plan 11.17.24
Hey traders-
Let us review some levels for next week first and then talk about a couple of execution and educational themes.
From last week, both 5960 and 6034 were my main levels. We did not trade 5960 until much later in the week on Friday and the level gave up without any fight. On the upside, 6034 was the level that held any sort of advance thru the week, with very little activity above this level-proving to be resistance from Tuesday thru Friday, before breaking lower.
This weekly plan is going to be a little complicated, so grab some coffee before we begin.
A few things make the week ahead a little complicated:
First off, the week is slightly light on event risk, so minus any major news, where is the catalyst going to come for directional clarity without watching the weekly close?
Then you get into the shortened Thanksgiving week right after, and seasonality kicks in which tends to be bullish historically.
On the technical side, we gave up 5960 level without much fight whatsoever. Whereas we saw a bounce, albeit a shallow one from 5880.
In my view, I do not think this is a proper bear market yet as some have pointed out, but this seems to be more of a rebalancing trade. Large cap companies in the S&P500 have a lot of anti-globalization risk at the moment, and to start with, they are quite expensive. This is exerting pressure on the main index as well and I think if this thing gets legs, we could have a nice bout of volatility to the downside.
Having said this, I think small caps are the place to be, and I have shared some small cap ideas I like later in the newsletter. I think under favorable conditions these could 2-3X in coming years. Yet, if you see the mega caps remain under pressure, no stock will be immune from the sell side pressure. This fluff has to come out and once the fluff is out, we should see clearer skies again.
If I were to put this together to form a plan for next week, I will come up with a couple of scenarios formed around this price action:
Scenario 1: 5880 could remain an important level and an outright rejection of 5880 could set the sights on 5800 levels. In this scenario, we remain below 5880 and are unable to close above it.
Scenario 2: Right now we are at 5902. If we remain bid here above 5900s, I favor atleast a retest of 5960 and expect some resistance for a move back down into 5903.
Come Friday, I think the picture should be far clearer for the month of December.
Generally, if we are here around vicinity of 5900 by the time Friday rolls in, I favor another retest of 6034-6050 by December. However, if we remain below 5880, I favor a deeper dip near 5750-5800 for the dip buyers.
Keep in mind that trading is not very different in spirit from warfare. A lot of new traders expect the markets to go up or down, in a straight line which is akin to saying a battle is won without firing a single shot from the other side. If you think about it, this is silly to harbors such thoughts. In battlefield and in markets, it is all about strategy. To position strategically, use your trading dollars as your soldiers. Trading is an iterative process. You win some battles. You lose some battles. But the end goal is to win the war.
In coming few years, the range expansion is set to occur. So if you were getting tired of 30 dollar moves all day under the prior admin, this is going to change. I am being conservative when I say we could see 100 point days on the regular under Trump admin. Every day. This is going to be enough for active day traders. You do not wanna sleep thru next few years.
Let us now preview some price action thoughts as well as some educational notes.
Buckle up; we are going deep in the weeds to help clarify some concepts and mis-concepts about markets.
Look at Chart A below for the intraday emini S&P500 auction from this week.
This is a good example of how the markets form ranges and trap traders on both ends, before the real move begins.
To help conceptualize this, it is important first to understand the key differences between orderflow and other technical analysis methods. Both of these approaches are in past tense. None of them are truly in real time. Know this. However, orderflow tends to be a bit more real time than traditional analysis done using indicators and what not.
In orderflow, we are basing our trading decisions based on presence of buyers or sellers. Sometimes their absence can also be a major clue. How do buyers or sellers express their intent? By placing market orders. These market orders then can be observed on a time and sales or a tape. While this is in past tense too, but is somewhat “more realtime”, relatively speaking. In traditional technical analysis, we are using formulas to create a picture of the trading world around us. So for instance, RSI is a formula. MACD is at its core a math formula and so are numerous moving averages used. While the indicator design itself is very objective, the way we use them makes them subjective.
Take an example of one of my and several hedge funds’ favorite strategy of measuring the trend using a 50 day moving average. A lot of traders watch and buy the first touch of a 50 day moving average in a trending market. It is a good strategy that can be backtested with good results.
The reason folks like these types of strategies is because they are extremely objective. There is no opinions or second guesses about a market touching its 50 day SMA. It is either there or it is not. See, so easy! You cannot mess it up even if you tried. Compare this to orderflow, which at times can be highly subjective. You have to answer the question, how many orders were there, were they buy orders or sell orders, was the trade just a hedge, or the trader had real directional intent? So this makes orderflow a little more subjective than chart based strategies.
However, where orderflow shines in contrast with other strategies is when you see some trader buy a 1000, 2000 lots at above support at 5980 (in Chart A above), and the market does not even rally 10 dollars, what does this tell you? Or as we approach 6034 again from Chart A above and the buying drops off, cumulative delta flattens or worse heads lower, what does this tell you?
So in my view, indicator based strategies are more objective in planning and far more subjective in execution. And orderflow is far more subjective when analyzing and far more potent when executing. As a good trader, you wanna use both of these strategies in some sort of a perfect marriage. Use longer term charts to identify potential support and resistance levels, and use orderflow to execute.
Based on my own personal experience, I can tell you, in intraday markets, no one is really sitting there taking a 20, 30, 40 dollar heat on a position. Think of it as options market. In options, how many times have we shared an option at 50 cents that went up 10X, or a 2 dollar option that went up 5X? You have to apply similar thinking to other markets as well- including futures and commodities/forex and stocks. In my personal experience interacting with hundreds of good traders, you will see a fanatical focus on cutting losses (managing risk). If I can cut my risk down to a a few points, there are going to be other opportunities throughout the day. However, if that one trade that goes against me 30 dollars, I am finished for the day. Perhaps my account is finished or what I called “bagged”.
One exercise every single serious trader needs to do is, go back to a sample of your last 100 trades. Analyze every single trade you made over past 3 months. This is what you wanna look for:
What percentage of times are you right?
How much you make when you are right?
How much you lose on average?
These 3 are the most important metrics for a trader or someone willing to become a trader. If you do not know these 3 about yourself, you are flying blind. Let me put it this way, if you do not know these metrics about yourself, you have no business trading yet. Try a demo account for a few months, figure out what your edge is before you test the waters. Do you even have an edge? Do you know how to measure edge? Edge is not about how often you are right, but how much you make when you are right and how much you lose when you are wrong. If the difference of these 2 is positive, then you have a positive edge. If not, you have more work to do.
The way human brain works is that we are wired from birth to be very sensitive to rejection. In society, we will go at lengths to avoid rejection, do all sort of crazy things, just so we get accepted by the “tribe”. This primal ape behavior is very hard wired in us. In a 9 to 5, in society, this tends to work and can shield us from rejection. However, in markets, this sort of behavior works against you. There is nowhere to hide in an active market. For years we will try to “solve” the markets so we can be right more often. Wanting to be right is the most harmful thing you can do for yourself as a trader.
I am gonna say something now which is probably gonna rub some people off the wrong way but this is cold, hard truth: “You are never gonna find a market methodology that is right more than 60-70% of times”. Ok, I said it. This is impossible to find a technique which will be right more than 60-70% of the times. SO, if you are one of those traders who is trying for years to decode the “Holy Grail”, this is the moment you give up on that quest.
Instead, focus on 2 things: when you are wrong, just take the L. When you are right, try and extract more from it. So if you are right on balance 6 times out of 10, and you make 5 points every time you are right, try and extract 6 points next time.
When you are wrong 4 times out of 10, and every time you are wrong, you lose 10 points, try losing 5 points instead of 10. And most importantly, whenever you are wrong, you think nothing of it. May be you think of it as tuition to Market Gods. By thinking this way, you will feel less offended when you get “bagged”, and will instead develop a “student mindset”, in which you think you are a student and be grateful for the learning opportunity, rather than assuming the markets owe you something. They don’t owe you anything. This is your homework from Professor Tic for next 2-3 months. See if it makes any positive change. Become a perpetual student of Markets, rather than a Master.
If there is one key takeaway from this post today, it is to know without a shred of doubt that no one knows what the market is gonna do next. And despite this harsh truth, there are traders making good money day in and day out. They do it by accepting the randomness of markets. They do it by cutting losers and just focussing on the price action to continue to find trades, even when they are wrong 4-5 times in a row. This enables them to continue to be in a mindset that allows them to find wining trades, rather than shut down mentally.
Again leverage Chart A above. Let us say you have bought 6034, but the moment you bought, the market is now back below 6030. You say it is only 4 points so I am gonna hang around here. May be even average the loser. Now you are averaged down to 2 lots at 6032 but the market has not had a single close above 6032 in any time frame, whether it is 5 minutes or an hour. What does this tell you?
Now you are long at 5980 because the RSI is oversold at -70. However, 10 minutes later the RSI is even more oversold at -80 and the market is now at 5970. You are now sitting on a 10 dollar loss when the market has not even gone 3 points in your favor.
A more favorable outcome will be if you buy 5980, and you see the market immediately goes to 5990, and you see more volume come in at 5990 with very little activity below 5980. These are what I call positive signs and in such a case, I may even add more at 5990. Or you are long, the market drops and you take the L. Since a lot other traders will have been long at 5980 (it is range low), they will try to get out the next time it retests it, which will depress the prices. This could be a good short entry to recoup what you lost on the long.
So to summarize this section: holy grails do not exist. Atleast not in day trading. There is no way you are ever going to be 100% right at all times. If you want to become a good day trader, you have to quit wanting to be right and start wanting to be profitable. The only way to do it to a) make a lot of trades b) scratch the trade or take the L when wrong. This is the Holy Grail.
Social media versus the flow state
Another unsolicited opinion I want to share with folks today is the havoc social media is wrecking on you on your path to become a profitable trader. 90% of us think in terms of images. What you really mistake for your thoughts is in-fact your mind replaying unpleasant images stored somewhere. It’s not real.
For instance, do this exercise with your eyes closed. Perhaps a little silly when you are trying to read the newsletter but do it for a moment. Imagine a nice beach with white sands and 75 degree sunny days, low humidity. You are there sitting under a Cabana with your bae, both of you sipping iced cold Margaritas. How does this make you feel? You are instantly at ease and are more likely to fall in flow state when in a calmer state of mind.
Now reverse it. Go to Twitter or insta and start scrolling thru countless, mindless posts about our world ending tomorrow, about foreigner invasion stealing our jobs, about politicians doing politician things. This imagery instantly agitates your mind and now you are in a higher Beta wavelength, self sabotaging mode. Remember, these guys who post this mindless content, are getting paid thousands of dollars from Zuckerberg and Musk to do so. You (and your eyeballs) are their product. In fact I will venture to say the more social media you use, the less likely you are going to win at trading. Trading is inherently a creative pursuit and with a destructive mindset, those two things are at odds.
Another very important concept to wrap your head around is that of the time frames.
Over a very long timeline, there is a natural floor under stocks. This floor comes from the stocks paying dividends and companies making profits.
What do I mean by that?
Let us take an example of PFE.
It is 24 dollars and change now. It makes about 6 dollars in profit every year, per share. And it pays a dividend of about 85 cents per year. This is about 7 dollars per share per year.
Barring the possibility that the company goes bankrupt due to high debt, if I buy PFE today at 24 and the stock goes no where for next 3 years or so, I now own the company free and clear because it has made that $24 in 3 years per share, thru earnings and dividends alone. As the population grows, they find work, they make money, that money has to flow somewhere. SO just based on natural rate of increase of population, there is always going to be a floor under the stocks.
Another way of saying this is that “Stocks only go up.”.
Now from time to time, there are aberrations like in last 4 years. S&P500 has over last 100 years, returned 10% a year on average. In last 4 years, this number has been around 15%. This excess 5% per year is due to several factors but mainly due to the endless money printing. This is why these stocks are expensive right now, due to this extra 5% that has come out above and beyond the long term average. This will get corrected in next bear market, sooner or later. Whether that is a 20% hair cut or a 50%, deeper the better for those with cash.
This is how the long term investing game is played. Over and over and over again. This has stood the test of times. When the markets do sell off 30, 40%, instead of losing your head, be active and invested.
Now while this is true for a long term timeline, if you are an active trader, this looses its relevance. In futures for instance, which many of us trade, one point is worth $50 on the emini S&P500 on one lot. This is an extreme amount of leverage, if you are day trading. On a 2% margin, even a 50 point move will wipe you out. This is why risk management is so important, due to the leverage. In brokerage accounts, like Vanguard, there is very little margin lending. Because they are geared towards long term investing, not short term degeneracy. I have multiple accounts myself. One for holding just the ETFs, one for holding long term investment ideas, one for just day trading degeneracy and so on. My point is, know your time frame and rest of it will take care of itself. Shorter your time frame, and higher your leverage, tighter your risk needs to be.
In next segment we talk about some ideas on my radar like TSLA and NVDA etc as well what I think could win huge from Trump’s regime next 4 years. There is a lot to unpack, you do not wanna miss this.