Link to the Real. It Pays.
Time is money and quick is better than slow and never is a one year certificate of deposit at the going rate of 0.15%, or lower. Even stone can’t wait that long. Enjoy income? Fact. Even a fat 6% dividend isn’t a locked-in win when the underlying share price crumbles by 7%. Think AT&T. That’s more like cycling money around and that mandatory yet exasperating process takes years. Meanwhile, traders are winning, many times quickly, and by design. Why? This market is only busy shuffling sideways, or falling flat out of bed. Smart money uses both hands investing and trading. Savvy money turns even more to trading when markets can’t consistently find up with either hand. Time is always busy and never waits or moves sideways. Think trading. Think GM. We are. The anatomy of the trade.
Trading is not investing and we’re not looking to marry GM. In April GM suspended both its’ dividend and all share buybacks in an effort to maintain liquidity. CFRA Research estimates that U.S. light vehicle sales will decline this year by 18.6%, while global sales do much the same, along with GM’s revenue. Oops. GM Financial also sucks, while accounting for 35% of total operating income. There’s more. A massive chunk of the company’s revenue, 40%, comes from the trade war disrupted Chinese market.
Keep in mind, we’re not proposing marriage. Our interest in GM is more akin to friends with benefits. GM–up 65.97% over 6 months. Who wants to ride public transport during a pandemic? Add to that the fact that the U.S. vehicle fleet is old by statistical measures. Of course the big run’s over. But the intraday churn trade isn’t.
The Detroit-based GM also faces increased labor costs due to its’ new UAW contract, and unfunded pension obligations. Last year’s UAW “negotiations” were flat ugly, and expensive, costing the company $1.89/share in annual EPS. Oh boy. By the way that suspended dividend was a chunky $1.52/share–poof, gone. Never good. Yet, yet, of all eleven economic sectors, Consumer Discretionary and IT are savagely out-performing the rest, with CD on top. Out of all industries within Consumer D., Automotive is absolutely dominating–up 131.5%YTD.
First things first. Remain liquid. Short term trading means cycling cash through the trade settlement process. That means the less you lock up in the cash settlement process, the more you have to work with. It also means that the greater your percent gain, the more efficient your use of your resource. As far as we’re concerned, buying and selling within the same week is day trading. Every dollar involved in such is locked down for three days. Unless your stack is unlimited, that means lower priced stocks are often more efficient plays. That generally means GM over AMZN. GM’s share price is literally less than 1% of Amazon’s. We’re not comparing fundamentals here, or long-term growth potential. We’re looking for very short-term playable moves within repeating patterns. That’s why we talked about Alteryx last time. AYX is an even better trade than GM. But more shots on goal pay, in the end.
GM’s no superstar, nor will it be. Yet GM’s climbed 57.1% in the last six months, but still trades at an extremely-affordable forward P/E of 12.47. Trading’s not about stars. It’s about quick playable patterns, in names safe enough to sit on if the trade fails.
Markets lacking a distinct up or down trend are battlegrounds. As we’ve seen repeatedly, this market loves and leaves; packaged consumer goods, tech, travel plays, cyclicals, and tech again. We’ve heard it, repeatedly, that a a tech/cyclical barbell is good. GM works that way as well. Only idiots trade trash, companies in bankruptcy, or ones lacking a track record. The length of time you’re in may not matter. Bombs go off without warning.
The Tools of the Trade
Trades live or die on timing. Any heads up you get is good. The Relative Strength Index(RSI) is a “momentum” indicator. It tracks “over-bought” and “over-sold” conditions. Use it and live better. The Stochastic Oscillator is also a momentum tool, tracking the same conditions. Yet they work differently, and by far the best, when employed together. Do so. After all, whether trading or investing or trading, entry and exit points alone determine success. Both the RSI and Stochastic Oscillator are explained in detail on the utterly fabulous website Investopedia.
The technicals, or charts, are the guide to trading. Among other things the chart, and its’ tools, can tell us when to buy and sell. Beyond the observable rise and fall of the price action, we have the simple moving averages(SMA) information. SMAs smooth the jerky visual confusion of the highly useful candlestick style chart. Beyond the price action and SMAs, we also have internal indicators. One group of those are the momentum studies.
Momentum indicators such as the Relative Strength Index and the Stochastic Oscillator, tell us how much strength is left in any directional move, up or down. Using those two tools in tandem creates greater confirmation of any move. Heightened reliability is provided when the RSI and oscillator agree. Of those two tools we primarily rely on the oscillator, looking to the RSI for further confirmation. The oscillator often leads the RSI in displaying a momentum shift. It also provides it’s own simple moving average(SMA), in the form of the %D line, a 3-unit smoothing SMA.
Studying the chart history of any particular stock will reveal precisely how reliable each momentum tool is in signaling price action shifts.
The Stochastic Oscillator. Signaling BUY & SELL points.
The stochastic oscillator’s %K line, in yellow above, represents the actual value(current tool reading.) It’s position within the range, its’ direction, sharpness of turn, and steepness of angle, all convey the relative strength of any momentum move. Additional weight is added when that indicator, the %K, crosses the %D line, in either direction. Such denotes unusual strength or rapidity of momentum change; change stronger than its’ current average. The example above displays a clear BUY, as the %K bottoms, deep in the over-sold range, turns abruptly, rises to cross above the %D line, in blue. Such represents strong buying pressure. Up is good. Sharply up is even better when
Our chart above displays a pair of BUY opportunities along with a clear SELL signal. This is a thirty minute chart–each candle representing a half an hour. 1. GM’s share price opens at $28.82 and closes $0.09 lower, $28.73. The BUY signal. While the RSI(single blue line) is just beginning to rise, the oscillator displays a clear BUY crossover(yellow line crossing above it’s blue 3-unit moving average.)
Three hours later the price-action tops out at $29.59, or a $0.77 move. In the subsequent thirty minute period the oscillator’s value line(the %K) crosses back below its’ SMA(%D) clearly indicating a momentum reversal, or SELL. 2. Beginning from the oscillator cross-over, GM’s share price rises from a low of $29.31 to a high of $30.42, a rise of $1.11. We see the top depicted in the third green candle. At that point the oscillator bends horizontal, while well above 75, the over-bought region. A horizontally bent %K, in over-bought territory, clearly indicates an intraday SELL.
Both example 1. and 2 display perfect agreement between these momentum indicators. The RSI rises in example 2., as seen in the rounded grey rectangle. The Relative Strength Index(RSI) and oscillator equally display the strong up-move. But it’s the oscillator’s crisp cross-over that telegraphs the shift, well before the RSI rises. Together they signal the loss of momentum at the top.
Small regular gains loom large over time. Any running back in the NFL will tell you that four yards a carry translates into a fresh set of downs every three plays. Likewise a $0.77 rise on one hundred shares equals $77. On a $30 share price that translates into 2.56%, in three hours. Compound that. A $1.11 rise on one hundred shares equals $111, or 3.69% in an hour and a half. It all adds up.
When you develop a stable of names you know how to play, it adds up to much more. Often when one’s not working, others are. The pair of GM moves came from only two days. Volatility ebbs and flows. No one catches the absolute top or bottom. Not to worry. The point is identifying candidates, stocks with repeating patterns. and learning their ways.
Rules of Our Trade
Cardinal Rule: Set BUY and SELL orders simultaneously.
If you don’t know what you want out of the trade, neither does the market. Understand the pattern of the price-action. The pattern will guide toward an exit price. Familiarity will guide you to more specific expectations for particular stocks. Trial and error will show you what works. Fact. Many sells trigger before the trigger price ever appears on the screen.
Many will say that you can’t time the market. Hogshit. Traders do it everyday. They do so successfully because they know how, and they observe some rules, as though they were etched in stone by lightening.
- 1. Only trade what you’re willing to keep. Trades fail on a regular basis. Yet quality always returns.
- 2. Stick to sideways or up charts. If the chart’s going down, so are you.
- 3. Lower dollar stocks lock up less money in the settlement process(typically three days.) Remember; you can’t buy and sell on the same day without sufficient settled cash to cover the sale.
- Maintain a “cash available to trade” balance. High quality shares cascade lower everyday for ridiculous reasons. Only those with dry powder can buy. Its’ buy or cry yo.
- Check your trades for efficiency. Check the online percentage calculator for your percent gain. Compare it to CD rates, and your average. It matters, and even more over time.
- Don’t chase. Chasing is chasing regardless of strategy. Buying Zoom Video here is a fool’s game. When names like that correct, they can leave behind highs never to be seen again. No? Think Tilray.