Is Using Incomplete Weekly Charts A Chart Crime?

Some technical purists claim it is wrong to look at a weekly chart before the week has been completed. For example, you should not be looking at weekly charts on a Tuesday and make your decision based on them because the week isn’t over yet. I understand that perspective but I don’t agree with it.

Weekly charts eliminate the noise and show the big picture. They let you see trends and ideas that you can dismiss on a daily or an intraday chart. Looking at a weekly chart on a Monday can give you a headstart of what it could be.

For example, I posted this chart of WVE on November 15 (Wednesday):

This is how WVE’s weekly chart looks at the end of the week. The setup and the risk to reward are completely different.

I posted this chart fo NKTR on Oct 31 (Tuesday).

You get the point.

Are All Analysts Useless?

“You don’t need analysts in a bull market, and you don’t want them in a bear market.” – Gerald Loeb

People like to mock sell-side analysts and point out how little value they add. Their calls are often too late, biased, and sometimes – contrarian signs.

Is it really too late to downgrade a stock after it has fallen 70% in the past two years? It depends. Stocks that make new 52-week lows in a bull market are usually there for a good reason. They can often keep going lower. For reference, check in the price action in coal stocks in the past few years.

A lower stock price can actually worsen a company’s fundamentals. For many, fundamentals only involve earnings and sales growth, assets minus liabilities, current and expected cash flow. But what’s behind all those ratios and numbers? A company’s reputation, the people that work for that company, the strategy they are pursuing, the technology they are using. All of the above form a company’s competitive advantage.

A company’s stock is essentially its currency. It’s a reflection of the market’s expectations and beliefs. If a company’s stock drops substantially, it will hurt its ability to attract and attain qualified people, which in turn will impact the service and the products it provides, the partnerships it can create, its ability to acquire promising startups and their technologies, etc. A big and continuous decline in a stock price can change a company’s fundamentals; therefore issuing a downgrade after a 70% drop might not be as mindless and useless as it appears.

The same line of thoughts can be applied to companies with rising stock prices. A considerable and sustainable increase in a stock’s price can actually improve a company’s fundamentals. George Soros’s reflexivity theory at work.

P.S. My twitter account @ivanhoff has been hacked and I don’t have access to it anymore. The gmail associated with it has been deleted, so I cannot recover it. How did they get access to my gmail? They called my telecom and pretended to be me, so they managed to transfer my phone number to their sim card for a few hours. Maybe, I should write a post about how to better protect yourself. I learned a lot about it in the past week. Anyway, my new twitter handle is @ivanhoff2. On StockTwits, I am still @ivanhoff.

Also, my book Top 10 Trading Setups is a great gift for the upcoming holidays.

The Best Performing ETFs Year-To-Date

Contrary to the popular opinion, the best performing ETF year-to-date is not the inverse short-term VIX ETN, XIV. A brief glance at the best performing ETFs so far this year doesn’t only tell you what has been working – in this case, biotech, China, emerging markets, and semiconductors. It also gives you a hint of what could be hot if there’s any performance chasing in the fourth quarter.

Taking setups in a currently hot industry is the single best tool for good risk management because it minimizes the number of failed trades and substantially increases the chances of catching a big short-term move. There are two main ways to gauge industry relative strength:

  1. Top-down – by looking at the performance of all industry ETFs on various time frames.
  2. Bottom-up – by looking at all individual stock setups. The industries with the most constructive setups are the ones currently in play.

I apply both approaches.

Online Travel Agency Stocks Are Waking Up

After spending the last five months going nowhere, CTRP, PCLN, and EXPE are trying to retake their 50-day moving averages. Relatively high short interest, strong earnings growth, a bull market, and a long technical base might be the recipe for a run in the fourth quarter.

Financial Markets Are Often Forward-Looking

The stock market often discounts events that haven’t happened yet. As a result, it sometimes discounts events that will never happen. Other times, it will predict and influence the future with uncanny accuracy.

Prices change when expectations for future profits change. Expectations often change before fundamentals change.

Take NVDA, for example. It went from $20 to $170 in the past two years. The first two-thirds of its move was mostly based on P/E multiple expansion. The market was willing to pay more for the same amount of current earnings per share. As NVDA’s valuation increased, the percentage of its short float followed. Until earnings caught up.

Notice how its short interest fell off a cliff around the $100 level. This coincided with a drop in NVDA’s forward P/E ratio. This is a typical story that we see in so many other growth names.  Once fundamentals confirmed market’s expectations, short-sellers retreated.

Short interest in momentum stocks doesn’t always rise with valuation. Tesla is a great example. Notice how the percentage of its short float spiked when it broke below its 20-week moving average in the second half of 2016. Short interest has been reduced significantly in 2017 as higher stock priced led to short covering and short covering led to higher stock prices.