Last Week’s Trading – 50% ITM

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Last Week’s Trading – 50% ITM

Hello everyone. I traded four times and ended up only 50% ITM last week, (cant win them all right?). I’m still reading my Price Action books, but its going very slow because as new topics are introduced, I have to re-read them and write down in my terms what I just read. It helps me remember topics if I write them down and visualize it. Currently I’m reading about two legged pullbacks. I won’t elaborate on that topic, it’s all over the internet at your discretion.

My first trade was on Aud/Usd. As price was dropping in a fairly recent bear trend and there were a few pullbacks that I was watching. I think my reasoning or the put was because the current bar I entered on found some rejection to a previous swing (previous support became resistance). Frankly I think it was a very poor decision to take this trade because I completely ignored the nice Pinbar right before the bar I traded on. This was a lower probability trade and it ended up OTM.

My second trade was on Gbp/Usd. Price was in an overall downtrend, and in the shorter term there was a bearish trend channel as you see that I outlined in the chart. I waited for price to come up and reach the trend channel resistance line, then I waited for a reversal bar to enter. As the next bar starts to drop, I waited for it to move below the previous bar’s low to enter. It was ITM.

My third trade was back on Aud/Usd. I should have weighed more on the fact the trend was changing because of the higher highs and the higher lows, but I guess I ignored it. I guess I had it in my mind price was going lower. One thing I recommend is to NEVER set it in concrete that price will move in a particular direction, because it can change at any moment. Follow price as it shows you where to go as the chart unfolds. I have a long way to go to get my mindset correct. It just takes time. Often I look back and ask myself “why did I do that”.

My fourth trade was on Gbp/Usd again. I noticed after my previous trade price was consolidating and not breaking out above the 20EMA, and it was gradually falling lower, so since it wasn’t breaking through the EMA or the trend line channel, I had enough reason to believe the probability of price to fall was greater than it was to rise, so I placed a Put. ITM

You’ll Never Guess How Much Money I Lost Last Week

It took just six trading sessions for all three major U.S. indexes to lose a double-digit percentage.

Last week, the stock market set a number of records, albeit not the type that investors are going to be thrilled with.

On Monday and Tuesday, Feb. 24 and 25, the history-rich Dow Jones Industrial Average (DJINDICES:^DJI) declined by more than 1,900 points, marking the largest two-day point decline in the 123-year history of the index. This was followed by the Dow, technology-heavy Nasdaq Composite (NASDAQINDEX:^IXIC) , and benchmark S&P 500 (SNPINDEX:^GSPC) all turning in their largest single-day point losses in history on Thursday, Feb. 27. When the curtain closed on this volatile trading session, the Dow, Nasdaq, and S&P 500 had lost 1,191, 414, and 138 points, respectively.

Image source: Getty Images.

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As the icing on the cake, the speed with which the stock market has entered official correction territory (i.e., a non-rounded decline of at least 10% from a recent high) is a new record. It took just six trading sessions and eight calendar days for all three indexes to lose a double-digit percentage of their value.

As you can probably imagine, there weren’t a lot of safe-havens investments for investors to choose from last week, and the spread of COVID-19 takes most of the blame for that.

COVID-19 is the official name for the lung-focused novel coronavirus that originated in Wuhan, within China’s Hubei province, and has infected more than 82,000 people in 50 countries. What’s worrisome, though, is that the number of newly reported cases outside of China is growing rapidly, leading to the very real possibility that the World Health Organization will declare COVID-19 a pandemic.

Aside from having a mortality rate of around 2%, and therefore being a serious threat to human well-being, COVID-19 is the proverbial monkey wrench that could be thrown into global supply chains. It’s what can drive consumer spending down, lower the demand for global oil, and more broadly send important economies into recession.

Image source: Getty Images.

You only lose money if you sell your position at a loss

With all this being said, you’d probably assume that I wound up losing quite a bit of money during last week’s stock market beatdown. Well, brace yourself, because I actually wound up losing nothing. Zero. Zilch. Nada!

I assure you, I am invested in the market, so I didn’t pull my cash out and resort to swimming in a vault full of gold coins, a la Scrooge McDuck in Ducktales.

The simple reason I didn’t lose money last week is that I chose not to panic-sell and head for the sidelines. In spite of the steepest one-week drop in equities in quite some time, there’s a far more important figure that sits at the forefront of my mind. That being the number 37.

Before this past week, the broad-based S&P 500 had undergone 37 official corrections since the beginning of 1950. This works out to a correction about every 1.89 years, on average, making downward moves in the market a bit more commonplace than you might realize at first.

What stands out, though, is that each and every one of these corrections in the S&P 500 (37 out of 37) has been completely wiped away by a bull-market rally. Sometimes it takes just weeks to put a correction in the rearview mirror, whereas it can take years for steeper retracements. Regardless of the time frame, the story is always the same: the stock market increases in value over the long run.

This means that if you buy high-quality businesses and give them a proper period of time to perform (a minimum of five years), you have a very good chance to increase your wealth.

Image source: Getty Images.

Only sell when it makes sense — not based on emotion

Understandably, there are times when selling a stock does make sense. As an example, if you need money right now to pay a bill, then selling a stock, even at a loss, might make sense.

Likewise, it could be time to part ways with a stock if it no longer holds up to your initial investment thesis. While you certainly don’t need a stock market correction to give you the motivation to review your holdings, a sudden move in the market does have a tendency to spur action on the part of investors. If, after review, a company’s business model or outlook no longer matches what you’re looking for, selling may be the appropriate choice.

Another example where selling might make sense is an effort to rebalance your portfolio. For instance, if one position increases in value substantially, it might become too large a percentage of your portfolio. Selling some of that position to invest in other areas may be prudent.

What absolutely doesn’t make sense is simply heading for the sidelines because the stock market had a few bad days. Not only is it unlikely that the long-term growth prospects for nearly all public companies haven’t changed over the past week, those folks who choose to sell and are effectively trying to time the market could very easily miss out on some of the biggest single-day percentage gains we’ll see on the way back up.

Remember, folks, you only lose money if you sell a stock at a loss.

Panic Seized the Stock Market Last Week. Here’s What to Do Now.

This is what a market panic feels like. But now that the storm has made landfall, it’s time for unnerved investors to sort out a few things: What just happened, why did it happen, and, most important, what should they do next. The pros have some advice: Don’t be too cautious.

What just happened? The coronavirus was declared a pandemic by the World Health Organization. Saudi Arabia announced a huge output increase, sending oil prices plunging. Forrest Gump contracted the coronavirus. There are no basketball scores to check. Baseball won’t start on time this spring. And President Donald Trump declared a national emergency on Friday after announcing a European travel ban on Wednesday.

Investors had a brutal week. All three major U.S. indexes fell into bear-market territory, ending an 11-year bull market in U.S. stocks.

The Dow Jones Industrial Average fell 2,679 points, or 10.4%, to 23,185.62. The S&P 500 dropped 8.8%, to 2711.02, and the Nasdaq Composite dropped 8.2%, to 7874.88. It was one of the 20 worst weeks of all time for the Dow. The weekly Dow drop came despite an epic 1,985-point rally on Friday.

The numbers are breathtaking. They will be talked about by our children’s children.

“This stinks, it’s horrible, we hate it,” Bill Smead of Smead Capital tells Barron’s, reflecting on the recent trading action. Unmitigated selling pressure causes a panic. No one likes a panic, but stock-market history is dotted with them.

“Most of the clients we speak to don’t feel like they are panicking,” says RBC head of U.S. equity strategy Lori Calvasina. That might be true, but that is the nature of a market panic. No one suggests people act against their own economic self-interest. But in a panic, the buy orders dry up. Traders step back because of extreme volatility. That leaves, essentially, an imbalance of sell orders.

There are, of course, new risks for investors to discount. Some, like a pandemic, are hard to understand. If investors go to Wikipedia to learn the definition of pandemic, it’s a sign things aren’t normal.

All the stress can compress investors’ time horizons. Falling 2020 earnings estimates start to dominate better potential earnings in the future. The S&P 500 now trades for less than 13 times 2022 estimated earnings. Things should be back to normal by then. It is also what stocks traded for around the lows of 2002, 2020, and 2020.

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That’s the what. The why is the easiest question to answer. It is the virus—and the fact that there are no good precedents to figure out when the crisis will pass or how many people will be significantly affected.

“I have purposefully stayed out of the science,” Calvasina says. “I’m interested in what the market is telling me.” And what the numbers show her is the market is pricing in a recession. “Last week the market was trying to hold 2,700,” she notes. That lines up with other 10% to 20% drops in the aftermath of the 2008-09 financial crisis. Those were market corrections. They didn’t imply recession.

The S&P 500 dipped below 2,700 this week before closing higher on Friday, after a final-hour rally. The next negative milepost Calvasina is watching for is 2,300. If the market breaks that level, then it is no longer pricing in just a garden-variety recession. It would signal worse things are on the horizon.

Even during the depths of Thursday’s 9.5% decline, the index hit only 2,479, well above her 2,300 barrier. As hard as it is to believe, the market tells Calvasina that it won’t be as bad as the financial crisis. The market doesn’t expect a grinding, year-plus slowdown accompanied by a 50% drop in stock prices. (The average peak-to-trough recessionary drop in U.S. stock prices is about 30%.)

What to do next? The pros advise against excessive inaction.

“Hiding in the market’s most conservative names was a nice idea three weeks ago, but it isn’t the best idea today,” David Donabedian, CIBC U.S. private wealth chief investment officer, tells Barron’s. “Just focus on good business fundamentals”—and don’t switch to names with the lowest beta or price/earnings ratio. (Beta measures a stock’s underlying volatility and correlation with the market.)

Calvasina agrees and is staying overweight in the industrial sector. “It is underperformed recently, but the sun will rise on the industrial economy again,” she says—probably by the middle of 2020, she calculates. Calvasina also recently upgraded her rating on the health-care sector, but not because of the virus. Former Vice President Joe Biden’s resurgence in the Democratic presidential contest reduced the “political risk” within that sector.

“This [volatility] will reverberate for a number of months,” Smead adds. He has 40 years of market history under his belt. He recommends shopping, too, but his shopping list includes his favorite stocks—which include home builders and banks—and not hand sanitizer.

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