Throughout last week, we laid out ranges in the S&P 500 where we will be potential buyers again. The update on March 10th discussed the sudden move and why we are viewing any bounce as an opportunity to build hedges and raise cash in positions where we seek a lower cost basis.
There were two scenarios provided given the sudden market drop last week:
(1) we’d have a deep correction or shallow bear market that would find a bottom between 2645 – 2520 with a potential spillover to 2500.
(2) or, we’re in for a bigger bear market that can find a bottom between 2340 – 2100.
I want to note that the market cut through the 2600 region with little hesitation and closed sub-2500 last Thursday. The overnight action in the futures market found a bottom in the 2400s before a much-needed corrective bounce that happened on Friday.
With realized volatility approaching record highs, many back-to-back ~9% days, and price unable to find support at key levels, this helps put into focus the scope of the bear market we are likely in. Within three weeks, the has market erased the gains that it took us 1.3 years to build. In short, we haven’t seen drops and rebounds of this magnitude since 2008.
With that said, this will be our last market update until next week as we now turn towards updating our conviction list with target entries. We followed our stops on many positions and are now working towards re-entry using the broader market as our guide. The story did not change on the stocks we’ve covered on the Top Stocks list. The conviction levels have also not changed, with the exception of Zoom – we are raising conviction from 8 to 9, even in light of its current valuation.
How I designed my risk management strategy
I personally got licensed in late 2007 and began my carrier in finance just in time for the great recession. In late 2008, I took over the Bay Area territory for my company and began developing relationships with countless financial advisors, RIAs and various CIOs regarding portfolio analysis as well as the implementation of passive ETF strategies within a portfolio.
Back then, ETFs were new and passive investing was not well utilized in portfolio management. This helped me get in front of many professional investment portfolios and strategies. Buy and hold is the ultimate goal. However, in rare cases where there are +50% drawdowns, like in 2008, I have found risk management to be crucial for the portfolios I personally handled during those years.
With this came my use of creating plans based on the broader market, back up plans, using stops, hedges and position sizing and other tools. I’ve regularly and openly discussed these to navigate volatility while investing with a long-term time frame.
As we have been doing from the day we launched, we will also cover targets for stocks where we have a low-cost basis already. We believe we are one of the only sites that continually covers pricing. We do not simply publish “buy recommendations” or a buy list. We hope this extra effort is worth its weight during this bear market.
Daily Chart
For any readers who are interested in how I came up with the 2100-2340 scenario, I’ve included some charts below. They use a combination of Elliott Wave counts going back nearly a century, with Fibonacci ratios and standard technical analysis.
I believe we are in a C-wave down. The C-wave is a 5-wave pattern pointing down. It is characterized as a powerful move that shifts sentiment to an extreme, which is exactly what we are seeing. Towards the end of a C-wave, sentiment typically hits a hopeless state, and without a game plan, investors tend to make the wrong decision at the worst time. Investors collectively feel panic in unison, watching the same situation unfold, and it leads to moments of capitulation, usually right before the market reverses. We want to do the opposite and use technical analysis to remove the emotion. If you followed our stops and hedges, you should be sitting on a nice pile of cash as well as having some long volatility plays to counter the losses on the long side.
From what we know about 5-wave structures, I estimate that we are in the final stages of the 3rd wave, and are likely in the corrective move of the 4th wave, which means we have the final 5th wave down to go.
One of the technical analysts who I respect and uses similar tools thinks we could see a termination as low as 1800 over the next few months. My count is calling for 2100 as the deeper bear market bottom. I’m not sure I will push it this far for target re-entries. Either way, we will spell out our targets for each stock around this time next week.
Hourly Chart
The above chart is meant to show 2 basic things: (1) how the downtrend, so far, is following the expected 5-wave pattern down; (2) the amount of resistance overhead, which makes a standard V-shape recovery unlikely.
If you feel like you have missed out on the bottom, please note the level of resistance above the current price. There are numerous unfilled gaps, two bear market trend lines, multiple simple moving averages and the 3140 peak – all while facing unchartered territory of a virus pandemic.
Where We Go from Here
The major risk to the coronavirus, as it pertains to the markets, is a lack of consumer spending. Will the extreme measures of canceled schools, postponed professional sports, Disneyland closures, etcetera last for three weeks or eight weeks or something completely unpredictable. The spiral effect of consumer spending matters here.
The second risk is quantifying the exposure the financial sector has right now to the buildup of risky debts in the system, which is why the financial sector ETF (XLF) is leading the charge down at 25%, and the regional bank ETF (KRE) is down around 37%. If and when this scenario plays out is anyone’s guess.
To put a stop to this bear market, we will need to see the market close first above 2950 and then 3150 to note a new uptrend in place. However, the bear market cannot fully be squashed until we make new highs at 3400. I find this less likely than my bigger bear thesis, at this time.
Position Updates
If you look at the Top Stocks List we published about ten days ago, you’ll see a column with stops. We followed those stops and logged gains on Chainlink at +44%, Shopify at +35%, Trade Desk at +32%, Telaria at +26%, BOINGO +9%, ALTERYX +9%, ELASTIC +5%, WORK +2%. We took losses on DATADOG -2%, BITCOIN -4%, Dynatrace at -9%, Inseego at -16% and a second position on Roku at -23%.
We do have some longer-term buy and hold positions that are unshakeable no matter how deep a selloff. These are Nvidia, Alibaba, Roku and Microsoft (we also provided stops for anyone looking to establish positions in these stocks within the last 6 months. We have been building positions for years in these positions, which is why we are willing to weather the drawdown with them). Subsequently, these are the stocks that Beth first covered prior to launching the site on Seeking Alpha. We were able to get a low-cost basis because of the Q4 2018 pullback.
Also, we are still holding Zoom (ZM). With the widespread use of Zoom into the global community through this outbreak, we have decided to both: 1) raise our conviction level on Zoom from 8 to 9, and hold our current position without stops. We are prepared to weather any drawdown that may come from panic selling due to our hedges, and will add to this position on any potential weakness. If you are uncomfortable holding without stops, please continue to use our recommended stops on the spreadsheet.
Zoom now joins a few other stocks that we hold without stops and have high conviction on: Nvidia, Roku, Microsoft and Alibaba. We fully expect many stocks on our list to join the “no stops, buy and hold” club in our portfolio after this bear market offers stellar long-term valuations.
We view this bear market/steep correction as a gift and will be re-entering any positions we stopped out of. As I mentioned above, our task over the next week is to evaluate each stock and publish a target re-entry for our readers. We expect that the broader market analysis we’ve diligently worked and laid out for you during this tumultuous market to be a good base for creating re-entry points. Without having done this work, re-entry would be complete guesswork rather than based on probabilities.
Lyft (LYFT)
So far, we are around 30% up on our Lyft short since discussing the hedge. We discussed waiting for a bounce to add. On that bounce, we initiated a short around $34 and so far, it’s been a remarkable hedge. We added more on Friday’s corrective bounce, which we disclosed on the form under Hedges, and we expect a bounce in the coming days/weeks as the price works off oversold conditions.
If Lyft crosses the 8-EMA, we will exit the short. We will look for re-entry when the market tops out, or breaks back below the 8-day EMA, which is currently sitting around the $30.
For all hedges we have a predefined exit such as using an EMA crossover, 25% trailing stop, a notable candlestick pattern, etc.
For these hedges, we will use the 8-day EMA as our stop going forward or a 25% trailing stop, whichever comes first.
Uber (UBER)
Our Uber short is up about 24% since our entry. We added more in the Friday rally, and will look to add more as the market tops out. You’ve heard me talk about symmetry on corrections. The symmetry on Uber is remarkable so far. The length of the first wave down (A), so far, is the exact length of the 3rd wave down (C).
Notice how the price closes right at the 100% extension of the A wave for 2 days in a row. If this level breaks, expect the 1.272 extension to come into play around $19-$19.50. We will use the 8-day EMA as our stop going forward or a 25% trailing stop, whichever comes first.
Slack (WORK)
We stopped out of Slack when it broke the $24.25 stop out price. We logged a fractional gain and are looking for re-entry. Considering that the structure now suggests that we are in an A,B,C corrective pattern, the C-wave should target around $14. This is the 100% extension of the A wave.
The strong hammer pattern coupled with the fact that smart money is buying and the RSI is oversold, suggests a retest of the $24-$25 region. For any longs on today’s low, I’d watch for these levels. A fail there would suggest a potential retest of Friday’s low, at which point, I will look to re-enter.
The $16 price target will be the area I will look to build a new position.
Roku (ROKU)
Roku is a buy and hold position that we own with a cost basis of $29.88. This portion of our portfolio is being held without any stops.
However, we are always looking to add more in weakness. We like Roku and we like that it gets beaten up because it provides for new entries. Beth strongly believes once this company turns profitable, it will enter a new stage from volatile/speculative (market’s opinion) to a market darling. She’s laid out why she likes Roku in great detail across PDFs, blogs, etc – mainly hinging on Roku’s ownership of the operating system, device and ad exchange plus the mega trend of Connected TV ads.
The above chart outlines our recent plan for adding to Roku. This new position we held with a stop around $86. We layered in at $125, $115, and again at $100 with a stop just under $86. The stop was triggered and we sold this new position on Roku for a loss.
We are looking for re-entries, and suspect that we will be range bound in the coming week. Notice the shooting star pattern as well as the hammer pattern. This suggests strong volume at $86 and $74. I wouldn’t be shocked if Roku struggles to break out of this range.
Next week will be telling. One thing is certain, on the daily chart, the MACD is making new lows and the histogram has not moved up. Buying Roku in the $70 range is a phenomenal value; the broader market is likely not done yet with its sell-off per our TA above, hence we are back on the sidelines for our new position.
Datadog (DDOG)
Datadog blew through our stop at $39.60 on a large gap at the open of the market. We sold just under the stop due to the heavy volume, and ended up logging a 2% loss. The reason we chose this stop is because it was the absolute lowest level DDOG could drop while still maintain an impulsive 5-wave structure. Below this level and it sets up an entirely new structure, which we believe puts us in a C-wave down.
It’s worth noting that DDOG is very oversold and the MACD, at new lows, is straying to turn up. For anyone attempting to speculate on a bottom, this would be a good level to try. We are believers in this company and will look for a re-entry.
In fact, when the market broke down into the 2500 region, we announced that we are putting money to work. This is one of the positions we bought around $32. This was a speculative play to attempt to catch the shallow bear scenario we outlined. We will look to add more and will update you on target entry next week.
Pinterest (PINS)
We recently attempted to buy Pinterest above its all-time lows, with a stop just below that level. We stopped out with a 2% loss, once PINS made an all-time low below $17.39, and missed out on a large amount of the current downside. The question is – how much lower can PINS go?
The RSI is confirming a bear market, and is also suggesting a continued bounce for now. However, the Accumulation/Distribution indicator does not show that the Smart Money is buying PINS at this level. If Pins breaks below $13, then we can expect the selling to resume. However, if PINS can break back above the $19 region, it will invalidate my current expectation, and be strong evidence that the bottom is in.
Bitcoin (BTC)
The above chart shows the long-term path we are tracking in Bitcoin. When looked at from a logarithmic scale, and not a price scale, it really puts into perspective the pattern as well as the bubble that caught the popular attention. The long-term trend is something we want to catch, and though the weekly risk management may be frustrating, it’s necessary when dealing with such a new and volatile asset like Bitcoin.
The micro chart is where this will play out for now. In short, we have 5-waves up, which is now building another 5-waves up on a slightly larger scale. Remember, when 5-waves builds into larger 5-wave patterns, the more bullish the structure becomes. If the price can break back above $5800 and hold, then break back above $6100, this will support the green count. If we break back down below $4300, it supports the red count.
The problem with these counts is that they both stretch the rules of Elliott Wave theory. They are both valid, but also both rare structures. Trading this 4th wave has been frustrating, to say the least. However, once we get a confirmed bottom and a renewed uptrend, any losses incurred can give way to gains. Until the price makes a decision, I will stay on then sidelines. Please keep in mind that below $4300 puts $1600 in play.
Chainlink (LINKUSD)
Please note: Chainlink is a crypto not listed on the public markets.
LINK broke through our stop and also the floor underneath the impulse we have been tracking. In breaking below the peak of wave-1, it broke a fundamental rule in Elliot Wave and completely invalidates 5-wave structure we have been tracking since the last bottom around $1.65.
This changes the structure into a likely leading diagonal, which suggests that Link has farther to go in order to complete the 4th pattern. We will look for a re-entry when the pattern gets close to completion.
Chainlink requires strict risk management, so opening and closing positions with strict adherence to stops. If you’re not comfortable with this, it’s not the right choice. We have opened and closed our position about four times since August with reasonable gains between 30-50% gains. I am active on the forum with this but it does require more active management.