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My Technical Analysis Trading Arsenal

August 15, 2017, 10:32 am

Stocks have trading rhythms, and technical analysis is how you can interpret those price movements to identify attractive buy and sell points. Increasing profits while reducing risk is the name of the game here. This is especially valuable in a volatile market, when price swings can be hard to stomach for a lot of investors.

When you hear the term technical analysis, you may have visions of fancy tools and confusing charts with lots of arrows and scribbles. While it can get complex and a bit overwhelming, I really use technical analysis to look at the direction – or trend – of a stock and analyze whether there is enough supply and demand in the market to keep that trend going in the future.

There are several tools in my arsenal that I use during analysis, and today, I thought it would be interesting to discuss the one that I use most often to not just identify a trend but also profitable entry and exit points within that trend: the relative strength index (RSI).

This is a go-to tool for me. It measures speed and direction of price movement over a period of time, and it’s useful in determining when a stock is oversold and ready for a bounce or overbought and ready for a pullback.

Stocks rarely trade against the market forever or even for very long. Odds are good that a stock that has defied underlying trends for a long time will have to reverse direction and deliver an outsized move in order to catch up. A stock that has gone down too far behind the broad market has had a lot of selling pressure pushing it down – this is called oversold. A stock that has rallied too farahead of the market will eventually run out of steam and/or hit a wall – this danger is when a stock is overbought.

The RSI is plotted in a range between zero and 100. Readings at different points along this range tell us a little more clearly which direction a stock is headed.

Below 30: An RSI below 30 indicates that a stock has been pushed into technical oversold position. It can still fall further, but at this point the divergence between its performance and the broad market is getting wide. On the other hand, a reading above 30 gives us confirmation that the divergence is narrowing again and the stock is bouncing. Depending on how deep the dip has been, even a bounce can make good money – especially in a volatile market. The underlying mood on the stock hasn’t changed, it’s simply how the math works out in a market where every position is connected to everything else.

30-50: A reading between 30 and 50 is still lukewarm at best. The stock is weaker than the market and will tend to float around at this level.

50-70: When the RSI edges above 50, it is technically rallying ahead of the market. This is a great point to be at. Momentum often feeds on itself, so good news is a self-perpetuating cycle.

Above 70: RSI at or near 70 can start to look overheated or overbought. The stock can cross this line, but at this level it is critical that sentiment remains euphoric for it to keep moving higher, which isn’t always easy for a company. But if it does, a stock can exist above 70 for weeks or even months and keep climbing. When the RSI dips below 70 and doesn’t regain that level quickly, this indicates that the rally has probably peaked. At that point, it’s best to either cash in or hang on for the next cycle.

One thing you may like about the RSI is that it’s pretty straightforward. Ideally, I like to open trades when the RSI is above 50 but below 70 – good momentum but not overbought. I also sometimes scoop up stocks that are oversold with an RSI down around 30, especially when there are other factors that make a bounce from those oversold conditions probable.

I hope today’s blog has given you a little insight into technical analysis and a tool you can use to help break charts down!

From Buzz to Business: 2 New Themes on my Radar

August 8, 2017, 5:30 pm

We talked a few weeks ago about the different ideas I keep on my radar that could eventually turn into blockbusters – they just need more time to fully develop into real investment prospects. I thought for today it would be fun to continue that conversation with two other themes I have my eye on: energy and tech.

1. Energy: This sector remains a red line until we get confirmation that $50 a barrel is closer to the floor on oil prices as tension within OPEC and around the world plays out. However, I can’t help but notice that the United States is finally in position to become a major exporter of natural gas that producers would have been forced to vent into the air even a few years ago.

If we’d played the evolution of liquefied natural gas (LNG) from the beginning, it would have likely been too rocky to tolerate. Now, however, with deeply supportive trade policy and the infrastructure in place, U.S. gas companies like Cheniere Energy (LNG), Sempra Energy (SRE) and Kinder Morgan (KMI) have the keys to become global players. Unfortunately, valuations in the group are on the high side, but on the right swing they may become interesting.

Whether you’re a big coal fan or not, it’s also clear that the Trump administration favors sales of U.S. metallurgical coal to countries like Ukraine that need to support their steel industries.

2. Technology: This is never far from my screen. We covered several hot spots last month, and this time around I’d like to add remote medicine and lithium into the mix, along with plays on automated workflow.

Remote medicine is interesting as a way for insurance companies and ultimately the federal government to better serve rural communities, especially those infamous counties where Affordable Care Act (ACA) carriers have stopped doing business. Just think of the impact the virtual or geographically distributed office can provide a consultation on demand, deploying their capacity and ultimately helping more people. Companies like Teladoc (TDOC) are at the forefront of this theme and others are venturing into it as the way doctors treat their patients evolves.

Lithium is technically an energy technology, but "technology" is definitely the operative word as all the world’s computers need batteries before Elon Musk can build one more Tesla (TSLA) automobile or home power storage system. While a lot of people favor foreign lithium producers here, I have to say Musk wants to use Nevada suppliers, which means Albermarle (ALB) leads a pack of small prospectors and other hopeful Tesla partners.

While the top-level view on workplace automation focuses on Big Data and artificial intelligence (AI) plays like International Business Machines (IBM), the nuts and bolts revolve around specialized vendors that are applying AI techniques to specific job functions. We’ve seen Salesforce.com (CRM) revolutionize customer relations, and the next wave is starting to build.

Of course, it’s too early to say whether any of these themes or companies will ever become good investments, as we need a lot more buzz before buying. In the meantime, they sure make for some interesting research!

Netflix’s (NFLX) Bulls and Bears

August 1, 2017, 10:22 am

Netflix (NFLX) remains a company admired by many, but somehow it always manages to stir the pot at the same time. We’re seeing that again following the company’s earnings report and the differing opinion between growth and value investors. Put simply, growth investors think the numbers were great while value investors feel the opposite. Let me explain why.

Growth investors tend to look at the company’s top-line growth of 30%, its opportunity to grow even faster in international markets (which account for over half of sales now) and its chance to monetize the value of its content beyond its platform.

Value investors and more hard-bitten types are quick to point out that NFLX sells at 93X next year’s EPS estimates, growth in the United States has slowed significantly and the company’s overall top-line growth is expected to slow from 30% this year to 20% in 2018. Bears have also highlighted that NFLX has negative free cash flow, and it is funding its operations through borrowing.

This is a special case where both sides are right. It is expensive to create and purchase content (management spent $8.7 billion on it last year), and had they spent it all at once the company would have reported a loss. However, accounting conventions allow NFLX to amortize this asset over a two- to three-year period, the time frame where management can expect to use this. By not expensing the content costs all at once, NFLX reports a profit even though it expects to have negative free cash flow in excess of $2 billion this year.

Few great companies have negative free cash flow for extended periods. McDonald’s (MCD) did this for the first two decades of its existence as it built its vast empire that generates quite a bit of free cash flow now. As long as Netflix continues to grow rapidly, it will be able to get away with having negative free cash flow. However, it could become a problem if it persists while NFLX’s growth slows.

It’s hard to say what’s in store for Netflix next, but it will certainly be interesting to see how the company evolves on cash flow over time.

My Special Media Wrap Up: Catch Up on All You’ve Missed Here!

July 28, 2017, 2:11 pm

It’s been a busy couple of months in the media for me, and I wanted to share my favorite clips with you in case you missed any of my latest appearances! Watch the videos below to see which stocks and trends are high on my radar right now.

Major Tech Firms Urge U.S. to Retain Net Neutrality Rules

A group representing major technology firms urged the FCC to abandon plans to reverse rules barring providers from blocking slow consumer access to web content. This could have a big negative impact, so make sure to watch my video clip to find out why it’s so important to have net neutrality!

U.S. Q2 Earnings Season Set to be Good

Besides tech and banks, I expect sectors like materials and defense to report good earnings for the second quarter. The defense companies have been really making a difference, and there are several companies I’m beating the drum on. Check out my video clip to find out which names within this sector I like right now, as well as my thoughts on this earnings cycle in general.

Trump Trade to Continue?

The good news is that September isn’t too far away, which is when tax legislation will be introduced. In this video, I weigh in on the impact that tax reform will have on the market and if the Trump Trade will continue. Check it out now!

Lighter the Volume, the Lighter the Trades?

July 20, 2017, 2:08 pm

One question that I get asked frequently at this time of year is how lighter volume in the summer vacation months affects an investor’s ability to trade. There’s no denying it has an impact, but that doesn’t mean you have to sit on the sidelines until the fall.

Volume is definitely a factor right now. The market is quiet even by summer standards, with turnover on the S&P 500 tracking at half of what it was early last July. We saw the real-world impact of that last Friday as weak trading volume held profits back at the big banks that reported earnings: JPMorgan Chase (JPM), Wells Fargo (WFC) and Citigroup (C).

But the market is still more than liquid enough to trade short-term positions. Lighter volume can accentuate price swings with fewer traders in the pool, and you can certainly take that into consideration. In a season where overall volatility is depressed, that additional movement can actually be your friend.

That said, I like it when upticks in buying activity signal charts that are ready to move. I prefer to use volume to confirm the price trends. With big bids more scarce at the moment, I haven’t seen a lot of baby bull trends beckon, which is why I will sometimes focus more on trading in and out of established long-term leaders. In those cases, volume isn’t quite as crucial as a confirming factor.

When I see the buyers come in around or after earnings as the reports start to roll out, those entries will open up all over the market as the volume bars spike. I know we’re all looking forward to that!

The silver lining is that there aren’t a lot of active sell signals around either. Rallies tend to start with a selling climax and end with a buying climax. Both have been extremely rare lately, but I suspect the next few weeks will provide plenty of hints in both directions.

5 Options Trading Mistakes to Avoid

July 11, 2017, 10:17 am

Whether you’re a seasoned pro or just starting out in the trading world, it’s easy to fall prey to mistakes that can end up costing you dearly. Let me share five of the most common options slip-ups and show you what you can learn from others’ mistakes before making them yourself!

1. Make a Plan

Approaching an options trade is very different from owning a stock. Once you buy shares of a company, they will sit there as long as you’re willing to hold them. You get to call the shots.

With options, the setup is a little different. In my High Octane Trader service, we purchase options based on specific strike prices and expiration months (yes, options expire!), so it’s important not to start blindly trading just to trade. I take many factors into consideration before making a recommendation, including what’s going on with that specific company and the market in general. Options can be an unpredictable game, and gains can quickly turn into losses. Know what your goals are before trading.

2. Multiple Eggs, Multiple Baskets

In other words, don’t put all your money (or too much of it) into one single trade.

Options provide a lot of leverage, which can work for you or against you. It’s important when entering a trade (or really any investment) that you consider your risk tolerance first. Never put more money into a position than you are willing to lose.

Given their risky nature, I generally recommend that options account for no more than 5% of your total liquid portfolio. The number you allocate to each options trade can vary based on the size of your portfolio, but a general guideline would entail about 1%-3% of your 5% options portfolio in a trade.

However, you would likely need to have a minimum of $1,000 in each trade or the commission fees can start to eat into it too much. So if you had a $500,000 portfolio, $25,000 would be allocated to options and $1,000 (4%) could be managed for each trade. Although this is slightly above the 1%-3% range, at most you would lose 0.2% of capital in each trade.

This is all based on personal preference and how much risk you are willing to put into each trade. If you’re looking to minimize your losses, these guidelines should help to point you in the right direction.

3. One Contract is How Much?

This next mistake goes hand-in-hand with the last one. Don’t forget how much stock you’re controlling!

If an option is particularly cheap, it can be tempting to buy more than you normally would. But keep in mind that one option contract means that you control 100 shares of the underlying stock. For example, if you buy 20 contracts, you are actually controlling 2,000 shares of the stock. If you would normally buy 500 shares of the stock, then you should buy five option contracts.

It can be easy to see a low price and buy 50, 100 or more contracts. Even if a contract is cheap, don’t buy outside of your normal range because it can quickly end up costing you.

4. It Pays Not to Pay

Options prices can be a tricky thing. Some can seem like great bargains, but could actually be trading at a steep premium.

Overpaying for an option is not a mistake you want to make. That is why in each of my High Octane Buy Alerts, I include a buy limit. I thoroughly recommend not chasing a trade above this price. I try to leave enough room in the current price and my buy limit so my subscribers have time to get in at a good entry point. However, options move very quickly and if you miss the buy under, I know it can be tempting to go ahead and buy in at a higher price. This sets you up for more risk as volatility can send options on a see-saw. Stay disciplined and don’t chase an option too high.

5. Avoid Gambling Your Profits Away

Options can be an exciting way to make money. The leverage they offer makes 100%, 200% or even 300% winners a real possibility on a regular basis.

For some people, that means when they have a solid gain in a position (say, 50%), they are tempted to continue holding the option in hopes it will keep climbing higher.

Even if there are specific catalysts in place to support this line of thinking, it can be dangerous putting your profits at risk for a fall. Even in a low-volatility market, it can be a good strategy to take your gains when you have them. After all, it’s better to secure your money and leave some on the table rather than lose everything should an option turn against you. Also keep in mind that you can always re-enter a trade if it continues to have a clear path.

If you’re convinced the option can trend higher, one good strategy is to at least take some profits off the table while still leaving a portion of your position to take advantage of any additional upside that might remain.

I know this is a lot to keep in mind, which is why I’d love to help you navigate the trading waters and avoid these financial blunders. This is what I do every day in my High Octane Trader service, so if you’re interested in learning more about options and the best way to play them, I recommend signing up for my risk-free trial now so you don’t miss my next trade!

3 Disruptive Themes on My Radar

July 8, 2017, 12:00 pm

One of my favorite parts of my job is keeping an eye out for and learning more about emerging technologies and products that have the potential to change our everyday lives. Regardless of what the market may be doing, there is always new buzz on Wall Street about the next great innovation. The trick is to filter through the chatter and zero in on what holds the strongest investment opportunities.

There are themes that hold potential, they just need more time to mature and fully develop into real investment prospects. Those are the ideas I keep on my radar, and I thought it’d be fun to share a couple of the top trends I’m watching that could become attractive plays down the road.

1. The Internet of Things (IoT): This concept is all about connected devices, such as smart ceiling fans and smoke detectors that send an alert to your cell phone if they sense smoke. There is a lot about the world of IoT that’s still developing, which means pure plays are hard to come by. While several tech behemoths trying to get an edge in this field, including Apple (AAPL), Cisco Systems (CSCO) and Alphabet (GOOGL), there’s a wide range of potential opportunities here. To fit internet-capable devices into product packaging, medical equipment and maybe even the air itself, developers are going to need new software, power systems and a whole lot of tiny sensors signaling their presence at all times. This is where I see some possible niche investments coming from and will continue to watch for the strongest ones.

2. Autonomous Cars: Converging trends in the transportation sector almost guarantee that you’ll find a parking place when 2021 rolls around – assuming that you’re actually looking for one. The next generation of fully autonomous cars and trucks from major manufacturers like Ford Motor (F) and Toyota Motor (TM) will be on the street by that point, and the fact that these vehicles will be able to steer themselves means more than a chauffeured ride for the people who own them. Autonomous cars are their own taxi drivers. Equipped with fare-routing software like the apps that drive the Uber fleet today, they can stay on the road as long as people need to be picked up or dropped off — no parking required in between! As with IoT, I see more potential in niche stocks that have ties to this theme rather than pure plays. For example, the companies that manage the fleets and build the vision systems that help these vehicles see where they’re going. It’s simply another case where science fiction is close to becoming reality!

3. Sharing-as-a-Service: The first wave of cloud computing pioneers made their money repackaging traditional information technology capacity on a subscription model, translating what were once one-time ownership transactions into recurring revenue. That’s ancient history. We’re now seeing the “as-a-service” approach slice across brick-and-mortar categories like jobs, housing (think AirBnB) and even ownership of basic household property. For example, if millennials stop buying cars in large numbers, ride sharing is the way of the future. The way to play this theme is to focus on companies that own the underlying assets as well as the innovators whose technology puts that inventory to work.

I hope you enjoyed this look at some of the game-changing themes on my radar. They’re not fully ready for us to invest in just yet for varying reasons, but are all worth watching for future profit potential.

The Age of Amazon (AMZN)

June 27, 2017, 9:55 am

Unless you have been living under a rock, you know that Amazon (AMZN) bought out Whole Foods Market (WFM) for a whopping $13.7 billion. While many on the Street cheered the news, retailers gave no applause. It’s understandable that brick-and-mortar stores are worried, but I don’t think this acquisition will have a huge impact on them just yet.

In the near term, I believe the competitive threat is a little overstated. WFM has already responded to lost market share with a price reduction in produce, and while AMZN may deliver further cuts, WFM needs very high gross margins to remain profitable considering its high cost structure. At this point, Amazon has reached a certain level of maturity where its shareholders want profitable growth, and I do not think losing money in the food industry would be welcomed. The acquisition should be accretive to AMZN’s forward EPS, and I look for just marginal moves to improve profitability at first.

The longer-term outlook is different as AMZN has the potential to change food retailing to its prototype store, which would eliminate checkout lines. I believe this is the major motivation behind AMZN’s decision to buy WFM, as it gains real estate to test its technology and potentially set the stage for further brick and mortar expansion. While I believe all retailers will eventually adopt this type of technology, AMZN’s first-mover advantage and deep pockets to remodel could give it a definitive edge. However, this transition may be at least three years away, so any immediate impact on smaller companies like Kroger (KR) would be minimal.

There has been talk that WFM may receive a higher buyout offer, perhaps from Wal-Mart (WMT) or even KR. I do not see this happening as industry leaders do not view AMZN as a short-term threat given the already-intense competition. AMZN built itself into a giant by offering home delivery, but operating a brick-and-mortar store where competition is high enough is something different.

By paying a very high valuation of 20X forward EPS estimates for WFM, I think AMZN has discouraged other offers. While WMT is the largest grocer in the United States, I don’t think its management feels they should pay up for a relatively small competitor just to keep AMZN out of the business, especially since the company could easily find its way back in.

When Do You Sell the Winners?

June 20, 2017, 12:57 pm

I was recently asked about how I decide when it’s time to lock in profits. And that’s a really excellent question. The decision to sell a stock is just as critical as the decision to buy, which is why my method of selling winners is a mix of art and science versus a generic formula.

My first step is to establish a sell target. These are usually an estimate of where I think a stock can trade within the next six-12 months based on my estimate of forward earnings and a reasonable multiple based on the company’s long-term growth, general market conditions and how industry competitors are valued.

When a stock hits my target, I then determine whether it’s best to sell, hold or raise the target. If I feel the stock can continue to outperform over the short to intermediate term, I will generally raise the target. For example, if I have been holding a name for a year and its earnings have been strong and the trend is likely to continue, I am comfortable raising the target as the market begins to discount next year’s higher earnings.

On the other hand, if the stock reaches or comes close to my target in a short period of time, this is a sign that it may be getting ahead of itself and could be vulnerable to a pullback. This was the case with GameChangers winner Cantel Medical (CMD, +15%) a few weeks ago, which ran up quickly on no news. While I believed the Street’s negative reaction to CMD’s fiscal second-quarter earnings in March was overdone, the stock recovered faster than I expected and momentum looked vulnerable heading into its fiscal third-quarter report on June 8. With the shares fully valued, it was best to stay disciplined and lock in our quick gains.

There are always exceptions to the rule, and in that case it is The Trade Desk (TTD, +35%), one of my GameChangers picks that went on an outstanding run. I have raised my price target on the name three times now, driven by three factors. First, there was the strength in its first-quarter earnings, which easily exceeded results on the top and bottom lines. This drove higher forward earnings estimates. Second, there was strong momentum in the shares as the earnings report was well received. And third, while the stock carried a premium PE of 40X next year’s EPS estimates, an even higher valuation seemed possible given the stretched valuations of several growth stocks, especially those in the software industry that are supported by the low interest rate environment.

Put simply, my decision on when to sell a stock rests largely on whether future outperformance can continue. I think about the strength of any earnings releases since I initially recommended the name, its longer-term outlook, its valuation compared to other companies in the industry and the momentum the stock has at the time.

My Top Three Growth Stocks Watch List

June 6, 2017, 9:36 am

There are so many investing opportunities, it can be hard to figure out which ones to invest in now and which ones might be worth adding to your portfolio down the road. This is why I keep such a close eye on my screens since you never know what’s going to pop up! The good news is that I have three names that I’m watching right now that are growing at a fast clip and have a bright future that could very well make for quality investments in the future. Let’s take a look.

Inogen (INGN) manufactures portable oxygen containers to patients suffering from respiratory illness. These containers offer greater mobility than traditional oxygen tanks, which also require regular delivery and cumbersome tubing. Revenues for the company have more than quadrupled from $49 million in 2012 to $203 million in 2016 and management expects sales to increase another 15%-18% this year. This rate would be even greater if not for INGN’s decision to put less emphasis on revenues in light of lower government reimbursements. Portable oxygen was the highest growth category of the Medicare Oxygen Therapy segment between 2012 and 2015, and since it is still only 8% of the total oxygen market, there is plenty of room for expansion. However, with the shares trading at 72X 2017 EPS estimates of $1.10, up from $0.63 in 2016, INGN is a little too rich for my liking.

Callidus Software (CALD) is a cloud-based customer relations management (CRM) software company whose products enable sales and marketing automation, learning management systems and customer experience management. CALD’s software has garnered a strong presence in the corporate world, as it is used by seven out of the top 10 technology and insurance companies and six of the top 10 telephone companies globally. This strong customer acceptance has driven a 29% compound annual sales growth rate from 2012 through 2016, with management guiding to another 28% increase in sales in 2017.

Consulting firm International Data Corp. expects the company’s market to double from 2016 to 2021, so there’s significant potential growth ahead. Valuation is a little steep now at 71X 2017 EPS estimates of $0.31 and 6X estimated revenues of $244 million, but this stock might be worth another look if it pulls back 10%.

Atlassian Corp. (TEAM) is a Netherlands-based company that sells and develops software. Its main product, JIRA, helps customers plan projects while working in a group or team environment. JIRA offers extensions that allow customers to work with other vendors’ products, including one to develop, build and deploy applications to Amazon Web Services. TEAM’s other products include Confluence, used to create shares and discuss content on the Internet, and HipChat, which helps teams communicate in real-time.

TEAM’s revenues more than doubled from $215 million in the June 2014 fiscal year to $457 million in fiscal 2016, and are expected to climb another 35% to $617 million in fiscal 2017. While I like the possible expansion, the shares are trading at 100X and 75X June 2017 and June 2018 EPS estimates, making the stock a little pricey right now. However, TEAM is near the top of my list of companies to buy should we get another healthy market sell-off.

I hope this gives you a good starting point! There are two other names I am watching, and if you’d like to find out which ones those are as well as the new stock I’m recommending to my GameChangers subscribers on Wednesday please make sure to sign up for this risk-free trial now so you don’t miss out!