Before the Market opened on Wednesday, breakouts were evident, and buy signals surfaced. These breaks happened after serious weakness in the NASDAQ and Russell, and caught many investors by surprise. This is often what happens when investors let their emotions get the best of them.
We cannot be blind to risk, but we cannot be blind to opportunity either. In my opinion, the only way to approach this market objectively is to take off the golden handcuffs, and don't get married to anything. Buying or selling stocks can be hazardous because many people want to base their decisions on information that has little to do with their overall objective.
For most people, they don't get involved in a stock because they want to hold onto it for 10 or 20 years, but instead they buy stocks because they see upside potential in the relatively near future. Most people buy a stock because they would like to make short term profits, even though the definition of short-term varies from person to person.
Because that is true, one material observation trumps all others, and that is an observation of price. Price is exactly what we focus on here at Stock Traders Daily, but not just price of the individual stocks. In addition, we also focus on the price of the markets, and it was that which prompted our recent positive tone after Monday's session.
Of course, at the end of last week the risks of breaks of longer term support in the NASDAQ and the Russell 2000 were real, but we have been talking about the weakness in the NASDAQ and the Russell 2000 ever since those markets began to pull back from longer term resistance, so the tests of longer term support that occurred on Monday were no surprise to us. What was significant, however, was the reversal from what appeared to be a break of support on Monday.
The ability of the markets to reverse higher was very similar to what happened the last time longer term support was tested in those markets in February, especially in the Russell 2000. This similarity played a role in my overall observation, and my decision to initiate buy recommendations in the Portfolio Series Strategy accordingly.
In addition, and importantly, the buy recommendations that were made for Facebook (FB) and Priceline (PCLN) were also made because those stocks had also broken their longer term support levels, just like the NASDAQ did, and they appeared to be reversing back into their channels too. This is important because it is based on a correlation that is extremely important. We want to trade stocks along with the direction of the market when we trade individual stocks. It makes no sense to buy stocks when the market is falling, for example, and it makes very little sense to short stocks when the market is going up, because as they say a rising tide lifts all boats, and vice versa. It is much easier to go with the flow.
Therefore, because the market reversed back into its channel on Monday and began to offer positive signs, the calls that were made to buy Facebook and Priceline were directly in line with not only the price based observations in those specific stocks, but also directly in line with the price based observations of the market itself.
Importantly, I did not make these calls because I like Facebook or Priceline in particular. I did not evaluate management, recent acquisitions, sales and revenue, cash flow, recent board decisions, or any other of the myriad of variables that could come into play when evaluating individual stocks, all I did was evaluate price.
Although it may seem as if none of the other variables played a role, they all played a significant role in my decision, but those evaluations were actually made by the smart money investors who ultimately govern the price of those stocks. In my opinion, they know better than I do, and by they I mean the market as a whole, so my experience has taught me to just pay attention to what they're saying. If they are telling me that the stock warrants a reversal just like the market has done, then it is my job objectively to discount all of the noise and react to what I know.
Of course, I can't do it blindly, and of course we cannot be haphazard in our approach, but instead we must be disciplined and structured, and in this case that is absolutely what we did. Our discipline was to watch for a reversal in the market, we got one, and we found correlated stocks.
On that same note, we did not choose stocks which were not correlating. That is also a very important point, because evaluating markets is easier, and if we are in stocks that correlate we are more likely to understand almost each and every move that happens thereafter.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. FB and PCLN were recommended to clients of Stock Traders Daily before the open on Wednesday, 4.9.14.
Business relationship disclosure: By Thomas Kee for Stock Traders Daily and neither receives compensation from the publicly traded companies listed herein for writing this article.