Every once in a while the market gives you an opportunity to put out your buckets and collect your coins with little to no effort whatsoever. For me, these moments are what have compounded my earnings more than anything. Being able to participate in a (sometimes brief) exaggeration in price and capitalizing on these moments of stark inefficiency are where you can make the “real” money.
More entertaining than the income (sometimes) is the ignorant rhetoric that surrounds these cult-like parabolic moves. Whether it’s GoPro, Bitcoin, Tesla, Netflix, weed or tulips, there are always those that simply do comprehend that these instruments are just vehicles that “drive” you from your current location to a place of profit. All the way up you’ll hear the naysayers tell you things like “valuation” or “unsustainable”, or “This is going to end really bad!”, or my recent favorite “You can’t make a living trading stocks like that!”
I want to start by saying that you’re right dudes. In most cases, you and your needle dick inspired fragile masculinity will likely be right in the end. You don’t need to wax poetic online, pick fights, tell everyone within earshot, mutter in your sleep, or anything more aggressive. You will more than likely be correct in your assessment that the valuation is too rich and that the move is unsustainable.
The difference, however, between being a butthurt keyboard evangelist and being someone who gets to enjoy the fruit of their “labor” is that being right doesn’t matter in this context. In fact, the opposite is true. If you are able to suspend belief long enough in these names to just enjoy the ride you’ll be able to garner more than the satisfaction of “being right.” In that case, not worrying about “being right” affords you the opportunity to be something better than right — profitability.
For the last $90 or so I have been suggesting that Beyond Meat (BYND) has been setting a bullish tone in its stock price. For the last $90 or so, and on a daily basis, a new idiot has surfaced to tell me that it’s not sustainable, overvalued, will end poorly etc etc. I’ve been trading for 14 years now. I have been trading publicly full time for five years now. During that time there have been a number of stocks that I have traded that have failed, no longer exist, or I don’t follow today.
Here is a short list of some of the names during that time that I have traded (profitably) and have not traded in years.
Yingli Green Energy
Green Mountain Coffee
Most of the above companies are not around these days and the others I haven’t touched in years (with the exception of two that I traded last year). The reason is simple — these IPO’s/stocks have a life span in which they are in favor followed by an inevitable decay. That simple understanding is what separates many individuals from being profitable and just pissing in the wind.
Some of my biggest winners ever came directly off that list (TLRY NVAX FEYE AMBA GPRO YELP specifically).
Fear and Greed
The important item to note here is that many asset vehicles will have their moment in the sun. During that time these stocks/trades are pretty much bullet proof as investors pile in throwing caution to the wind. A giant echo chamber will develop during that time and you’ll hear more and more people clamor that this is “new” and that you’d better get on board before you “miss out” on it. There is nothing new about Wall Street though. No matter how you slice it, trading is built on the same human emotions today that it was built on hundreds of years ago — fear and greed.
Infinity and Beyond
Once the greed mechanism takes hold of a stock traders and investors alike will pour in almost at any price until that greed is thwarted. This episode has played out time and time again specifically with the list of stocks above. In these instances, the stock/investment vehicles start to trade outside the scope of rationalization. This just means that people suspend reality and buy with the idea that it will “grow” into the valuations. Compounding this irrational exuberance is the introduction of short sellers who foolishly and/or boldly (depending on your perspective) step in front of the runaway locomotive pressing share prices higher and higher. With that said, so long as you are able to understand that these types of stocks/vehicles are trading vehicles until they stabilize you are able to leverage their irrational behavior for your own benefit.
Beyond Meat is the latest stock to exhibit this type of irrational behavior and press into oblivion. This stock’s behavior has been remarkably similar to Tilray last year. In both instances, a lack of available supply and real competition, along with an exorbitant amount of demand and some aggressive short sellers create the perfect molotov cocktail for the stocks to explode higher. Along the way the echoes of “overvalued… speculative garbage… unsustainable… etc etc” all ring louder and louder. And like I said above, though these echoes are probably correct, they are not profitable.
In instances like this, it is more prudent to tune out the noise and simply listen to the price action. What good does it do me to be right on what “may” happen without profiting on it? Personally, I’d rather just be profitable.
The irony however is that I need the noise in order to be profitable. At least in the form of dollars that is. Those “brave” (stupid) enough to get in front of the stocks sling shot at the ones that will be putting food on my plate. They will be the fuel for the flame higher. As they step in and short the stock, it only sets up for more and more returns until the stock reaches its inflection point, or something material evolves suggesting that you should not be in the stock. Until one of those two events takes place, euphoria driven stocks are not ones that I am an advocate of stepping in front of. You can hate the stock, just don’t let your hate fuel your profits.
So, like last time (TLRY), let’s take a look at the signals to follow in the future should an event like this take place again.
In the below charts I highlight a couple of key items to look out for in a situation such as the BYND trade. First of all, it is important to mark the primary resistance levels that the stock has encountered in the past. In such instances you make yourself aware of the patterns that are ongoing in the stock and highlight which levels are indicative of a change. In the case of BYND, the stock found the 175 level (give or take) to be the point of no return when it broke down in mid June. The breakdown also coincided with a downtrend starting with the previous high on Jun10. As the wedge got tighter and tighter, the stock found itself breaking the downtrend just one month later on July10th. This was followed by support on the 5MA and a little sideways tension until it held its lifelong uptrend which is still in tact.
The two pink arrows above represent the break in the downtrend along with the 5D support and the 275 breakdown level that was functioning as resistance.
As is the case with most things, all it takes is a catalyst to really get the ball rolling. In the case of BYND, their upcoming earnings report, DNKN partnership, and fake bacon (new product) rollout really pressed shorts to cover. As is the case with momentum, an object in motion stays in motion. This rule applies to stocks. As a stock starts to accelerate and new money piles in, those who have held are rewarded to hold until a previous level. Those who are short are forced to cover or risk eating more losses until the next major level of resistance. As you see from the above chart, once 175 broke out and confirmed, the next major level of resistance was around that 200 mark (previous all time high). Once that previous high breaks, the sky is the limit.
In cases like BYND, the follow through of the break of the 175 told me that the next level to watch for was the 200 level. This led me to “size up” with an easy stop point below. In these cases, I continue to roll my profits forward until a capitulatory selling event. Along the way, with options, it becomes “easy" to maintain the position. Simply sell out of your cost plus a little profit every time you get a double and continue to roll forward. I know, it sounds crazy to suggest “every time” you get a double but that is how it works. When a stock like BYND explodes higher like it did in June, options prices get inefficiently expensive. As the stock sinks back to reality, the opposite becomes true as people “forget” about the stock. That allows you to trade for a double (relatively) easily should that stock move in your direction. Below you will see that at the time of the breakout confirmation, buying options $10 out of the money cost you around $2. You will also see that I was able to roll up for around the same price which allowed me to stay in the trade.
The roll up occurs to lock in profits and to keep your position size relatively the same should the stock continue. With volatile stocks such as BYND any random $4 spike can occur in moments and wipe out your premium that took hours to build so it is important to stay prudent and halve your position on a double (or better) and simply roll up some of the profits to maintain the position.
Lastly, and I am no “expert” at reading options data, but I am versed enough to understand that should you see any major options prints come through with your breakout — stay in the trade as long as you can.
In the case of BYND there was some serious size that came through (likely in the form of a stock replacement) that fortified our conviction in the trade.
The above will show you a breakdown from the alert in the chat to the profits as of yesterday.
One More Thing:
The last, and primary, thing I want to emphasize with trades like this and with names like this is the same point I was emphasizing at the beginning. These trades, are just that, trades. It is important to understand that these are not investments and that these stocks have a shelf life. There will inevitably come a point where the value of BYND’s current price outweighs what investors believe will be sustainable. That inflection point, likely coming in the form of some capitulatory event when volume is multiple of its average, is your indication to leave the stock. In my case, I avoid looking a stock like that for AT LEAST a week. I said looking not trading. In many instances I never return.
An example of this was my first major winner NVAX. Back in the mid 2000’s bird flu mania swept the stock market and small/mid cap vaccine companies were bought hand over fist. NVAX was the name that I traded at that time and if memory serves me correctly I traded it from the teens to upper 50’s. The moment the stock fell out of favor, I simply removed it and moved on. I never looked back. I just checked and apparently the stock still exists and trades around $4.
Another, more recent, example of this is VRX. I made my “name” online trading that one all the way til it peaked. Once it peaked I was fortunate enough to pick up on the signals and short it. I remained short until it was destroyed losing nearly 90% of its value.
Im in no way, shape, or form suggesting “look at how great I am.” I am simply stating that these high volume momentum names are just that — momentum names. Use them as such and you will find a mechanism for profitability in this market. Don’t let your love and greed get in the way of your objectivity. When the easy money is over, walk away.
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