Markets are getting wild. New and greedy traders can only see higher prices in small caps, tech, bitcoin, and even silver now. This isn’t even a very big stock correction yet and I see posts about massive losses. New traders who only know markets that go up have extreme leverage on YOLO options that expire in days. On the dips they buy more. Short-term they feel like geniuses and post their accounts going up 1000% in days. They will all end with $0. Their risk isn’t sustainable and they are trading on borrowed time.
Controlling your risk is hard. Extremely hard. You have to be able to ignore FOMO of more potential gains and be happy with what you have made. Most people can’t do this and even if they time a wining trade right and ride it up, they have no plan to profit and end up riding it all the way back down.
Make a strategy for yourself that books REALIZED PROFITS when the market rises, and is prepared for an inevitable sell-off when it falls. If you fail to plan for what could happen, the market will make a plan for you. Make peace with missing parts of big moves, and be happy with taking portions of the rally’s you time right. Controlling greed and having a plan on when to sell (up and down) is the only way to profit in the market long-term.
Stocks continue to decline and I even put back on some some small short positions yesterday. I didn’t see any bullish signs yesterday other than traders trying to “buy the dip” and time a bottom. This type of action is what makes declines last. Traders buy a “deal” based on recent prices being higher, then are forced to panic sell even lower. I’ll likely take profits on the shorts as soon as this morning’s gap down open. I’m not greedy, especially with short positions during a bull market. This market could jump straight back up to new highs without warning.
Despite this morning’s action, I don’t want to be on the short the side of the market for more than quick scalp trade here. That’s why I don’t recommend them. I can’t ensure everyone reading this would control greed and get out. Then they could be stuck in a short position in a potential bubble market. For now, the correct side of the market is still the long side, this is just a short, necessary correction. Here’s why:
The US economy is about to reopen, more stimulus is coming, interest rates are staying low, and the fed is still buying with both hands. People are about to feel euphoric as they are able to get back to their regular lives, see friends, go to events, and travel. Once this euphoria spreads to the final bubble in stocks and everyone sees no risk and think everything is going to go up forever... that’s when to sell and take a break from the market. We’ve seen some sectors overheat (electric vehicles, solar, fuel cell, big data), but a broad market-wide rally is still to come.
Corrections are natural and necessary. The real money is made on the long side. That’s the opportunity I’m looking for now... To buy and potentially ride the bubble phase.
I think tech, semiconductors, and genomics have to most potential once the market turns back up. I’ll stress, be patient and wait for a turn. Even last Friday’s move higher was just a bounce. Lots of traders bought and likely didn’t sell yesterday. Now traders will start to panic. At some point soon there will be a snap-back higher and we will see if QQQ, IWM, SOXX, and XBI can make new highs or if they fall short. When you buy, always have stops you are comfortable with. If your stop is too far away, find a different risk, or reduce your position size.
Looking forward, if the Nasdaq isn’t able to push strongly through 14,000 on the next push higher, markets may have just seen a short term high on extreme sentiment. Markets have rallied since September and could need some time to cool off. Action could be very a choppy, sideways/downward action for weeks. I’ll continue to trade the long side in the areas with the most potential, keep stops in place, and take gains “early”.
On silver, I’m holding my PSLV position with a close stop. There was heavy volume in silver yesterday, but not the price movement to make this a strong breakout. High volume and at a relatively flat price makes me worried a powerful move down could come soon if price doesn’t take off above the #silversqueeze prices that started the month.
Silver needs to break its highs from earlier this month and do it with force. If it doesn’t, it feels like traders are being set up here. Gold and gold miners are still trending lower and generally lead the precious metals market. Silver tends to lag gold, then snap (higher and lower). I’ve been looking for a bottom in metals since October. While it looks like it could be the move Ive been waiting for here, I still need to see the right action.
Right now action looks like new retail traders are piling in and the market is still easily controlled by the manipulators. I hope it finally breaks higher, but I’m skeptical given how the last few weeks have played out. For now I’m holding my silver position and have stops in place in case retail traders get taken to the woodshed on their emotional trade. I trade the action I see, not the narrative I want to believe.
As I’ve mentioned in past posts, I want to see the EUR/USD break about 1.2190 decisively. It almost reached that mark over night, but turned back down. Until it moves higher on strength, all risk-assets will experience a head-wind. If DXY breaks down to new lows, then risk-on is the right confirmed trade. Until then, be very cautious.
It’s impossible to know when the top in Bitcoin will come. For me, I made money from the break above 20k to 40k and was very happy with that. When bitcoin went above 40k I bought again, but felt the move wasn’t strong enough and risked a much bigger sudden decline. The risk wasn’t worth the reward, so I got out with a second profitable trade.
Bitcoin could rally from here, but it needs to do it fast (~65k+ by next week). If you are investing in bitcoin here know that you are gambling on a parabolic move. A large correction is inevitable and you are playing musical chairs. I have taken profits and found opportunities elsewhere.
Follow your plan,
RSP
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