Weekly Plan 9.15.24
Hey traders and future traders-
I want to kick off the post on a slightly different tangent and share my views on technical analysis and its efficacy in these markets in 2024. This may a controversial topic for many of you, if not most. So you can skip to the next section to get to the levels for next week, if you think otherwise.
But first, a couple of very important admin updates. The pricing has been increased by 10% keeping in-line with prior notice. For those who were not aware of this pending price hike, you can use the below one time code that expires on Tuesday to get in at older prices and get grandfathered in. The other major change is that the morning chat updates will only be shared with the Founding members from now on.
Substack recently made this possible and I will be fully leveraging it. If you like the morning chat updates, please upgrade to the Founder tier.
When we as retail traders (most of us atleast), interact with these markets, our first engagement with these markets is in form of some sort of technical analysis- me included. Decades ago when I first started in markets, invariably everywhere I looked for information on tradings and markets, the vast-vast majority of content available then (and now), was focussed on some sort of tech analysis which almost always is based on charts and indicators. In fact this was a major driver for me to launch this substack- to share with folks an alternate way of looking at the markets using real time price action concepts.
Now there is some sprinkling of fundamentals here and there, but that is like 1% or even less. Personally, I see little value in fundamentals, unless you understand an industry extremely well. Even the investment greats like Munger and Buffett don’t employ dozens upon dozens of analysts and accountants to perform fundamental analysis.
"An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."
Back in the 1990s, Berkshire staked one quarter of its entire net worth into one company- Coke.
The entire DD and investing decision was based on what Munger and Buffett learned from owning See’s candy a few decades earlier. See’s candy was purchased for $25 million which was big money in the 1970s. And this acquisition generated so much cash that it helped build Berkshire what it is today.
So back to the Coca Cola investment, Munger and Buffett did most of the DD in their heads with no fancy spreadsheets, no input from the CPA and the investment banks, no analysis of weekly and monthly charts, certainly no RSI and MACD. And they have held on to that stake they acquired 30 years ago. That initial 1.5 billion dollars investment today pays more than $1.5 billion in dividends alone each year.
This underscores the fact that in investment time frames like years to decades, most tech analysis is futile. What you will gain from any sort of charts or indicators or balance sheet analysis is reflecting the current moment, not future. To understand an investment, you need to have a strong handle on the industry and some sort of macro situation. This comes from experience in the industry.
So what about shorter trading time frames like intraday trading and swing trading?
Well, this is even more fascinating and sometimes I laugh looking back at my own attempts to understand the markets using charts & indicators when I started some 20 years ago.
Intraday trading or short term trading, when it comes to the institutional desks and bank traders, is dominated by quants and algorithms in 2024. These firms go out to the TOP ivy schools in the world and hire people with advanced degrees in math and physics. Many large traders have used geo satellites to draw imagery of the oil fields or shipping channels or to map out the global crops and harvesting seasons to determine trading ideas.
Many other firms use super quantum computers to dig thru terabytes of data to find seasonal ideas, or to find correlations between markets going back 50-100 years.
Yet there are other firms whose sole existence is based on speed. These firms spend billion dollars building communication towers and internet lines between major trading hubs like New York and Chicago which transmit differences between prices of same asset like Gold at the speed of light. These firms then use these differences to scalp these markets and trade on millisecond time frames. Or they sense large orders hitting the exchanges using colocation and front run these orders to eke out fractions of cents in microseconds.
I share this to highlight that this is what you are up against - both long term and short term trading. I do not share this to disregard chart based analysis but I do stress that chart analysis has its limits, especially when it comes to extremely short time frames like intraday trading.
Now does a retail trader, working from her home or her office, making some trades has any edge at all or is it all a naught?
I think for a small retail trader the biggest advantage is small size and nimbleness.
Yes, you read it right, your main advantage is that you are a small trader and you have the freedom to trade or not to trade when you do not sense an edge in the market.
Bank traders do not have this edge- they have to be in a trade at all the times. Market makers have to make a market as part of their agreement with the exchanges at all times. This is legally binding stuff.
You on the other hand have no boss, no contract with big exchanges, you can be on or off at will. This is a big advantage for smaller traders. However at a basic level you must understand what works and what does not work.
Any sort of short term chart analysis in my opinion is futile. Charts are extremely useful for smaller traders in longer time frames, for instance in swing time frames. In intraday time frames, charts actually can be a handicap. Market moves are dominated by flows. These flows change every day. Which in turn means the daily range or volatility is not the same on any given two days. Any indicator you place on your chart will use the chart data to spit out a signal. So if the signal is based on second hand historic information, how can this third hand info be useful in active trading?
You need to be as close to the flows as possible and using a level 2, or using time and sales is a big edge atleast for smaller point and click traders using mouse for trade entry and exit.
Read up my work on market profiling, level 2 DOM, Tic top indicator to get a deeper insight into some of these analysis techniques.
Now why do charts work in slightly longer time frames?
It is because they can be a tool to understand the relative pricing of the markets in a moment of time. If you look at the most recent example I shared Bullish RDFN on Tuesday at $10. This stock rallied 25% on Friday and closed some 45% higher above from $10 at $14.5.
See Chart A below.
So in this chart you can see this market was ranging for quite some time between 5 and 10 and recently closed above 10. In this case, $10 is relatively a good support level as the market broke out of this congested range. You can say that the market has found a new range. Now in this instance, this market will either keep going higher. Or find a new range between 10 and 15 or fall back below 10. These 3 scenarios are only natural. Now no one, Warren Buffett, Jerome Powell, Jamie Dimon, no one really knows that Redfin will do next but every one can observe its price action next few days and weeks and can observe support and resistance levels develop in this stock.
Do we really need to add some indicators on top of this price action to get more edge? Does it add any value if I add an RSI or a Bollinger on top of this chart? Will adding two more moving averages make me a better trade?
I will let you think about it and come to a conclusion.
Personally I think it adds 0 value. Furthermore, if I have 10 ideas let us say, RDFN, GVA, MLI, NVDA, TSLA, AMZN, PLTR, DJT, SCHD, NEU, PM, MO, KGC, ORCL , OPEN etc, I will view them all as equally weighted and throw 100 dollars at each one of them (as an example). Furthermore, I will say I am willing to risk no more than 15-20 dollars on each one of these 10.
Now I shared these 10 as the most recent names I shared in this Substack in last few weeks or days, but you can really extrapolate this to 100s of other ideas I shared in last year or two.
Let us say I am wrong on 50% of these. This means I am now out of $100. If you multiple $20 MAX risk by 5, it is 100.
However on the other 5 that I am right, my target is 2X that risk so may be 30-40. SO on the ones that I am right, I now am up $200. I arrive at this by multiplying 5 by $40.
The net here is $100. This is not bad outcome at all- if you tell me, I can be right only half the time and end up positive, sign me up. These are much better odds than gambling at a casino, and unlike a casino when I am consistently right, no one can throw me out of the markets just because I am right a lot. Now how is this not much better than Vegas ;)?
Now you as a reader can decide if our win rate is 50% or higher. Based on this list above alone, it seems like it is much higher than 50% ;)
This is not a new concept that I came up with. Everyone on Wall Street and their dog is chasing these same concepts. And they are quite happy with getting a 60% win rate as long as the edge is there. It is only our retail community that must get a 100% hit rate or they won’t play. And then instead of spreading their risk out of 10-20 stocks, they will go all in on one stock. And never take loss when wrong.
I think that is counter productive. 10-20 is a sweet spot for number of ideas held at any given point of time. Anything less will make it more concentrated which is not bad but just more risky, and anything more will make it more diluted, in which case why not just own the main index?
And these all don’t have to be common stocks. These could be gold, oil, currency, bonds, stocks, crypto etc. By doing this, you lower your beta or in other words your exposure to the main index is reduced. If you are all in TSLA and NVDA, then you might as well be all in NQ or SPX. Which is ok as long as you understand that you have 0 diversification.
Levels for next week
Now the market action from last week can be summed up as more folks come around to an idea of a much larger rate cut next week on Wednesday. This has excited a lot of traders and we see this translate to large moves in dead stocks like PENN.
I called for this a few weeks ago that I see a 50 BPS rate cut, not a 25 BPS rate cut and the bond market now is pricing in a 50 BPS rate cut. S&P500 Emini is here at 5640 in front of this major news event - it is safe to say that the market may already be pricing in a 50 BPS.
Looking ahead a few more weeks, there is also a lot of uncertainty due to election cycle. This calls for SOME caution. It is one thing throwing caution out of the window near 5400, it is a different topic to do so, so near to that 5703.
With this out of the way, my key levels this week will be 5660. On the downside, my key levels will be 5578.
Scenario 1: If we open and remain above 5660, I like to see a test of 5692-5703 which may see resistance emerge near 5692 for a move back down into 5643-5660.
Scenario 2: Until broken, 5578 remains an important support. If we are able to get a Daily (D1) close below 5578, I do not want to fade this move as it may lead to more volatility. An update to be issued via chat or daily plan if this is the case by Wednesday.
These levels are for September Emini. I will rollover at some point next week.
If you are on December, add about 60 points for December levels to these. Both SPX and September Emini now are about 5630.
Other things on my radar
If you look at some of our recently shared winners like GVA, MLI, NEU etc, importance of having a set of good levels cannot be understated.
You can see a fairly robust rally in GVA once it came down to our support levels. This is why it is so hard to fade these Orderflow names- Many try. Few survive. There is a tremendous force and sponsorship from larger funds behind such names which will crush any one naive enough to fade such stocks. This is an endless list which you can peruse going thru archives- BX, WMT, KGC, CTAS, AFL.
Almost carbon-copy actions in MLI and NEU as well, shared here only like 10 days ago.