@NiftyTrader901- I am making changes to my trading in 2023
Longer hold times, more risk and a new setup.
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I am making some changes to how I trade next year.
Instead of choking off my trades, and looking to survive by taking small gains, I am going to hold on for bigger moves. WHY?
I expect that some time next year, market will bottom, the bear market we have had this year is very very rare, it happens once a decade or less. The opportunities would be immense from this bear market, stocks are going to make 500-1000% moves in 6 months. This is an opportunity to make life changing returns.
This is not the time to focus on limiting your drawdowns but to playing the long game. That means, I am going to show a bit more heart and be open to larger drawdowns - in the range of 10-15%.
Am I just going to hold longer term, at the turn of the year? No. This change will trigger when following happens
Based on my market view, I believe we are in a new bull market.
I am up 10% or more for the year.
What specific changes will I make?
If a stock is coming out of a nice base, early during the bull market, I will hold it through next earnings, if I am up at least 10% on it. Based on my past studies, this is a key pattern that repeats, where stock tends to make big move after earnings, one example is NFLX in late 2009 but there are many more.
Hold a stock breaking out of high tight flag pattern with a 20 ma as a trailing stop. Stop needs to violated on closing basis. Early in a bull market there are lots and lots of high tight flags. Don’t sell them at 20% gain, they can make 50-60% moves in many cases.
For regular VCP breakouts, rather than aggressively selling into strength, sell partials with 20ma, 50 ma trialing stops. Or if stocks nature is more suitable - 10 ma is also a good trailing stop.
Anything else?
Yes, apart from VCP, I am starting to trade a new setup - buying earnings gap ups.
My first aha moment for this setups was when, Jim Roppel of Roppel Capial Management said in an interview “I have made over 50% of my profits by buying stocks that gaped up on earnings.” Later, I learned this setup from Pradeep Bonde, who calls it - ‘Episodic Pivot‘. Finally and most importantly, I have done an in depth study on this setup. I have studied every single gap that followed through 20% or more in the last 5 years, I have studied- strength of the catalyst, entry and exit techniques.
Here’s a few things I have learned -
Stocks make explosive moves after gap ups if
The catalyst - earnings or other is truly surprising to the market.
Stock is showing big growth in revenue and earnings. Revenue growth surprises are rare and have outsized impact on stock reaction.
Stock has not made a big move recently or in it’s lifetime.
Smaller stocks tend to make bigger moves.
You can enter such a stock at the open or after it breaks first 1/5 min high. Stops will be low of the day or sometimes - per-determined percentage stops.
Here’s an example from 2021.
AMBA
Stock had a 12% gap on earnings day, it was up 90% in next 3 months after the next earnings report. Stock had been going sideways for 9 months, prior to the report.
It reported 483% earnings growth, 40% surprise to what was expected. It had a revenue growth of 58%
Here’s how the report looked like on the earnings day -
Reports Q2 (Jul) earnings of $0.35 per share, $0.10 better than the S&P Capital IQ Consensus of $0.25; revenues rose 58.3% year/year to $79.3 mln vs the $75.91 mln S&P Capital IQ Consensus.
Co issues upside guidance for Q3, sees Q3 revs of $88.0-$92.0 mln vs. $78.54 mln S&P Capital IQ Consensus. Gross margin on a non-GAAP basis is expected to be between 61.0% and 63.0%.
"Our rapidly expanding AIoT foundation has positioned us to achieve record revenue in F2022, driven by new product cycles in existing markets and the expansion into new markets. The quality of our business is at its highest levels, with IoT cameras, primarily security, and automotive, representing ~90% of total Q2 revenue. We are capitalizing on this as demonstrated by the 450 basis point sequential increase in non-GAAP operating margin, reaching 16.9% in Q2..."
Multiple Analysts upgraded the stock on earnings day before market open. All of these increased probability of an explosive move. That’s it - that’s the setup.
If you interested in studying this setup and making it a part of your repertoire, you should study it just like me. That’s what builds conviction. I am happy to guide you if you’re interested, let me know in the comments below.