Trading Journal Notes from Gil and Dr. K regarding this past week's pocket pivot alerts:
GM - Fortunately, we only put out two pocket pivot reports this week, which is not surprising given the deteriorating nature of the market. As I pointed out in our Thursday webinar, there is a stark divergence between the broader market as measured by the Russell 2000 and NYSE Composite Indexes and the major market indexes. That point was reiterated in our Friday morning Pre-Market Pulse. With the market coming apart on Friday, cash, or at least more of it, strikes me as the most prudent approach to take here. I do think that investors need to be more mindful of what they are buying in this environment. In my view the evidence argues for the fact that probably we send out far too many pocket pivot alerts without regard to quality or a sense of what is actually working, even if only slightly, in this market. Big-stock NASDAQ names have led the rally off the lows of late September, and this is one reason why so many pocket pivots in smaller names have gone nowhere during the same time period. As I see it, this is something we need to look at seriously in order to improve our hit rate when it comes to these pocket pivot alerts.
DRK - A big part of successful investing is in organically moving money into the strongest names as the market dictates. Given the troubles smaller caps have had all year, these types of stocks may look seductive but have not been the lower hanging fruit. Nevertheless, some prefer smaller over larger caps because the gains in a short period can be greater. That is a false seduction and can increase losses especially when the markets are showing clearly that smaller caps are failing. Thus, as we have reported, larger caps have been the names with better odds. Nevertheless, over the last couple of years, when markets sell off, most stocks come apart in rapid fashion. Thus keeping stops extra tight has been essential in this highly unforgiving market.
Comfort Systems USA (FIX)
GM - I never buy into strength, preferring to buy stocks on constructive weakness following a display of technical strength, and I NEVER buy breakouts. In this environment, the standard-issue CAN SLIM dogma of buying base breakouts in "quality" leaders simply sets one up for failure, and FIX is no different in this regard. Now the stock is streaking for its 50-day moving average and looks to be set to test the line on the downside. In this market, however, this could simply be setting the stock up for a late-stage base-failure if it is unable to hold the 50-day line. This is one to simply avoid after the breakout failure, in my view.
DRK - Buying on pullbacks near support works best this year as we have reiterated. With markets trending lower as part of their sloppy, sideways manner then selling off further on Friday, a tight stop under the lows of either pocket pivot day would equate to a piercing of the stock's 10-day moving average. When markets sell off, very tight stops will help minimize losses. This buying close to support at the stock's 10dma would result in losses of 1-2% or even less.
Jet Blue Airways (JBLU)
GM - Your first clue that something was amiss in the airline sector was when Southwest Airlines (LUV) blew apart on Tuesday after guiding its growth numbers down. JBLU stalled out on a breakout attempt on Monday, but held up in the face of Tuesday's negative news coming from LUV. However, JBLU issues its own similar news on Friday, sending the stock gapping to the downside. Again, we see an example of a stock that is breaking out, and it is simply mindlessly futile to try and buy these types of breakouts. Another issue with this current base is the heavy selling in the base while upside volume has remained muted. This is a detail that investors should probably not ignore when evaluating a one-day show of strength. Throw in a deteriorating market, and in my view JBLU is on track to rendezvous with its 200-day moving average this coming week.
DRK - The stock should be sold as it pierced its multiple overlapping moving averages. Had one bought closer to major support such as when the stock pulled back to its overlapping moving averages, losses would be minimized. it's important to remember that one does not have to trade all the time. One's risk tolerance and trading personality will help shape such rules. If one feels compelled to trade all the time, that is a red flag. That said, one can mitigate losses by using small position sizes when markets are not acting right. This week, we saw markets retest the lows of its trading range then fall further on Friday. The warning signals were there. the markets have been the most challenging this year this our guidance of keeping stops extra tight and buying on weakness apply especially to such periods. Losses are then minimized so one can hold onto gains which have been tough to come buy since August.