Weekly Update: This is Normal
Good evening, and welcome to this week’s edition of Stealth Trades!
After a big move higher last week, stocks traded mostly flat this week. The Nasdaq fell 2.3% on Thursday which wiped out the gains from the first half of the week.
You likely saw some of your positions pull back this week. Let me reassure you…
This is normal.
Stocks do not go straight up. Even in the best conditions, they stairstep their way higher in a series of higher highs and higher lows.
That means there are multiple pullbacks within the uptrend.
The market has gone pretty much straight up for the last four months. The Nasdaq index has gained over 30% since March.
That is an incredibly powerful rally which, at some point, needs to be “digested.”
Stocks get extended, prices get ahead of themselves, and FOMO pushes retail investors to pile in near the top of big moves like this.
It is both healthy and necessary for growth stocks to occasionally pull back and “reset” before continuing their move higher. Investors trading on excessive margin and impatient amateurs who are chasing gains need to be stopped out so that supply and demand can again even out.
Wildly speculative activity leads to crashes (look at the 2000 dot-com bubble to see what I mean). And that is the last thing we want to see.
Take a look at the weekly chart of the index below:
Note that we are trading up against the final supply zone.
When I say “supply” I am simply referring to areas where a large number of sellers are likely to sell. They are offering shares for sale and thus creating supply.
Anyone who bought at the end of 2021 has been underwater for a year and a half. The thought of getting out at break even is going to be appealing, especially after such a hard and fast run.
I wouldn’t be surprised to see the market struggle here for a few weeks while these sellers are digested.
Since the market bottomed in October, we have not seen a pullback greater than 12.5% in the Nasdaq (9.0% for the S&P 500).
In my opinion, 10-15% pullbacks are the norm in a healthy bull market, and I look at them as opportunities to buy leading stocks that are holding up the best.
I expect to see a shallow pullback in the next 2-3 weeks. I could be wrong. But based on past bull markets, this would be more than warranted at this level.
Some members may have noticed the number of new trades slowing down over the last 1-2 weeks. This is not an intentional action, but a result of fewer trade setups in an extended market.
We don’t chase stocks. We look for low-risk, high-probability buy points in the top stocks of the best-performing groups.
When we see a lot of those, we make a lot of trades. When fewer opportunities arise, we trade less. It really is that simple.
My FIRE Trader Club service is a great example of that.
In May we initiated 14 new trades. Our watchlist was lighting up like a Christmas tree and entry points were being hit left and right.
In June, only 7 FIRE trades triggered.
And three weeks into July, we have only seen 3 actionable setups this month.
Again, this is not our analysts being lazy. It is a result of a cooling market and speculative activity slowing down.
If investing for the long-term, I would stay the course. Stocks are likely to be higher by the end of the year and much higher in years to come.
In the near-term, however, I am getting more cautious. This does not mean going to cash. But I am taking profits more aggressively and nailing down some of my open gains to remove unnecessary risk.
If you have been following our ideas, especially in the Alpha Stocks and FIRE Trader Club services over the last few months, you have had a very profitable start to the year.
My advice is to continue to be picky. Demand the best stocks in the best groups at ideal entry points. Don’t get sloppy with your trades and give back your hard-earned profits.
If stocks keep setting up, we will continue taking the trades. If they don’t, we will wait for low-hanging fruit.
Here are a couple trades I’m watching right now:
Redfin (RDFN)
RDFN is a stock we bought in my Alpha Stocks service on June 27 when it broke out above resistance at 11.50.
It rallied 50% over the next three weeks but has now pulled back to a level where I would consider adding to or taking a new position.
Redfin is a powerful stock, but it also has a history of 15-20% pullbacks throughout its up moves. As of Friday morning, the stock is 20% off its high with support at the 21-day exponential moving average which has contained this surge thus far.
Traders may consider buying here with a stop loss near $13.
NIO Inc. (NIO)
NIO is basically a Chinese Tesla. They are an electric vehicle manufacturer with seven models in production and have so far delivered around 400,000 units.
I don’t typically like Chinese stocks, but this one looks poised for a breakout higher.
Below is my stage analysis for NIO stock on a weekly chart covering the last four years.
The first breakout into a new Stage 2 uptrend is, without question, the best place you can buy a stock. If NIO can hold above its 200-day moving average and breakout higher, this could be a near perfect entry on this growth stock.
Hims & Hers Health (HIMS)
This is a potential short trade that could deliver a nice gain if the market pulls back. I am still focused on buying opportunities, but it never hurts to be prepared for the other side.
Some of you may remember this as a stock I was looking to buy a couple months ago.
Oftentimes, the best short ideas come from stocks on my long watchlist that fail.
HIMS tripled from October to April but began rolling over after a poor earnings report at the beginning of May.
Not only did the stock fall on above-average volume, but even a 33% discount has failed to attract buyers.
HIMS has formed a support shelf near the $8 level. A move below that would trigger a lot of stops, making it an ideal place to sell the stock short.
Best wishes for your trading,
