UNLIKE most businesses, the narrative of a trader is such that if you are early you are wrong. This shift in perception different from the "real world" makes our lives more complicated. Our instincts in any business venture is to be early and ahead of the crowd. Unfortunately as a day trader, especially one that trades decaying options, that philosophy will get you slaughtered.
As traders (not investors) it is our job to be speculators. We must speculate where the price action is suggesting that a stock will go. With our speculation we must also be quick and decisive. Our actions during market hours are a result of our actions and studying while the market is closed. Recently many individuals have been getting abused by being stubborn and not assimilating with what the market is trying to tell them. Their instincts of how things "were" have literally driven them into destitution all-the-while creating massive opportunities to the long side.
Specifically, a fundamental shift has occurred in the markets recently where the "Trash" of Wall St. (TWTR, BABA, WYNN, CAT, URI, AA, CLF etc etc) has caused massive upside sparks. Traders have either changed their narrative to fit these massive upside moves, or they crumbled with them.
So what's happened? Have investors really stepped up to the plate and searched for "value"? Are we seeing some sort of rotation into the next leg of the bull market?
WHAT THE FUCK IS GOING ON?
You may have heard the talking heads on TV tell you that a lot of the winning stocks that started their fall from grace were managers taking their profits off the table in case of disaster. Managers typically milk their positions as long as they can, that's why the winners continue to win and the losers continue to lose. So the inverse of taking some off the table occurs with the losers. I am of the camp that believes if you have a short position and it's been a real winner, as a manager you want to lock that profit in when you can, not when you have to. It's my belief that this situation coupled with a "floor" in the market created a perfect opportunity for a quick rally in some of the laggards in the market.
This rally started when China went offline last week with names like WYNN and BABA. The IWM poked its head near its previous lows at 107 and held. With that hold a volatile swing to the upside began. The market rallied to a "Historical close" and we haven't really looked back since. Many names that have not caught a bid all year have gone on violent upticks. The likes of WYNN and other casino names rallying as much as 20% in one day. This uptick saved the markets from a cataclysmic death spiral and subsequent potential test of the 1820 level. This spark viciously catapulted the markets higher, and higher, and higher, and you guessed it -- higher.
So is this a beta chase, the next leg higher, sector rotation, managers trying to match the market, or what? It could be a multitude of those events. Again, I am of the belief that the same names that made a killing for managers on the way down are the ones that need to be covered to free up cash for the next move. Time that with the recent perfect bounce on IWM and the rest of the market and you have a perfect storm for a pain gain higher, especially while China is offline.
So what now?
People who are not familiar with Technical Analysis, the average Joe's, will cry "Market manipulation" till the end of time. If you are a proponent of TA however, you'll notice that a lot of these major moves did nothing more than push right back into downtrend resistance at the same moment that the overall market meets its "line in the sand" moment. We're currently pressed against resistance and have formed a trading range at the base of a bear flag. For every negative indicator there is a positive one.
So whats the best approach? Well that all depends on your appetite for risk. If you're an action junkie then it's best to trade the wild swings intraday and remain in cash at the end of the day. For those of you who like to swing the best approach is probably find stocks within a trading range and trade lightly through that. And for those of you who don't know what you want, it's probably best to just wait. Wait till the madness chops around and for things to pick a direction, then you get in.
So with "Trash" turning into treasure as of late, let's take a look at some of the stocks that have been the beneficiaries of this sudden shift, and what the potential may be.
TWTR (dirty bird) found a floor at the 24 level and has been on quite a run since. The issue which has been range bound between 24.3 and 28.3 for almost two months found ample demand in the last two weeks powering through the previous resistance at 28.3. Currently, the stock is sitting just below the resistance at ~31/share. Above this 31/share price, the stock is poised to test the 32.61 gap down high from mid August. For me, I'm a fan of waiting for that 32.6 to be broken on strong volume before I would enter.
COP XOM XLE
Like all other oil stocks, XOM has taken been left for dead since November of last year. The issue found itself in all time high territory last summer and has been precipitously falling since. Like many stocks, XOM got ahead of its skies to the downside. With oil finding a "floor" near the 2009 and 2005 lows dip buyers found a place to start accumulating. Many of the stocks that eroded in the last year started to catch a serious bid as they'd accelerated their descend well below their downtrend. XOM is a perfect example of this as the issue caught a bid and has been on an uptick as of late. XOM caught a bid and found support near its 2009 resistance and 2011 support. The bounce has been pretty technical and the issue will find itself testing the downtrend it started over a year ago shortly.
That theme has echoed throughout the space as XLE and COP offer similar chart patterns and trends. XLE and its components as a whole will soon test their downtrend line started in 2014 and will either be rejected sending the entire space lower again or will confirm this new uptrend is in fact for real.
This is a name that was directly impacted by China and by nervous investors. With a new high set at 120 around this time last year, this name has been in liquidation mode ever since. Having said that, as you'll notice, the stock really started to separate from its downtrend in August of this year and recently found "support" around 58/share. after some brief consolidation at that level the issue has taken off dramatically. Whether its overall bias change, china bias change, value investing, or whatever the case may be, the stock has take that 58 support to heart and taken off from there. As you'll see, the stock still has room to go before retesting its downtrend line.
WYNN has been a name that has been hit hardest by China's fall from grace. With the stock eroding from 250/share to ~50/share in a little over a year and a half. At the 50 level the issue found "support" and it didn't take much news for it to start its explosion to the upside. You'll see the pattern to similar to the stocks above where the issue got ahead of itself to the downside leaving plenty of upside room all-the-while maintaining its downtrend. This is further validation that bear market rallies are the most powerful.
IWM was the leader to the downside and it recently found a floor at 107 while on the verge of a bad jobs number and a potential catastrophic breakdown to the downside. This floor and hard reversal sparked a vicious rally to the upside where it currently sits at resistance.