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Best thing to do in an unpredictable market? Adapt your strategy!

How I’m adding to my Stock Portfolio

With the long weekend now behind us, to open up the trading week, I’m stepping back from my normal macro analysis for this issue.

I want to take some time to tell you a little more about my favorite strategy, but also the exciting new twist I’ve added to it given the current market conditions — you’ll love it.

Plus, I’m including some helpful charts near the bottom and as always, trade ideas…

My strategy, the Five Star strategy, isn’t just used for short-term options trades. It can also be used to build a stock portfolio. How’s this done?

It’s done by identifying relative strength names, in key sectors, that have a technical setup along with a history of performance. Being backed by fundamentals is also a big component of this strategy.

I typically like to re-balance the sectors I’m looking at on a quarterly basis. During the sell-off in December, there really weren’t any sectors that were standing out. The sell-off was sharp and emotional, hitting sectors across the board. A lot of it was almost certainly related to forced liquidation of funds and algorithmic trading.

Remember, markets don’t move because they want to, they move because they have to.

I also want to recognize that December 2018 was a pretty unique market situation, and I want to go back and ‘respect the trend that was’ (anyone recognize this phrase from our Futures and Forex expert, Raghee Horner?!)

This goes back to both the trend and fundamentals on the actual stocks, especially when looking at long-term stock plays. Many of these names got hit hard by selling, but in reality their fundamentals never changed. Often times, when selling hits the market, traders will dump strong positions because they need the cash flow, but it’s not because there was anything wrong with the stock — either technically or fundamentally. Therefore, once the market started rallying, they were the first to rise.

It wasn’t until the low was made the week of Christmas, and the rally ensued, that I was able to identify the ‘Phoenixes’ in the market.

What are they?

These are the stocks that rose from the ashes, the stocks with the strongest ‘wings.’

Starbucks, Nike, and Amazon were some of these names. I typically trade AMZN on a frequent basis, and I’m holding stock in NKE. I have a current open position in SBUX. I’m also looking to add a few more.

Phoenixes are especially trade-able during this time period, due to the ‘Run into Earnings.’ We can combine this overall analysis, and add in the earnings factor.

For a deeper dive into Phoenixes, and how they’re currently playing in the market, check out my segment recently on Yahoo Finance. Just click my tweet below:

 

 

To do this, I go back and look at strong stocks that performed especially well last quarter after their report, and look for a similar run into earnings here. Let’s take Starbucks, for example.

Starbucks (SBUX) Daily Chart

Notice the explosive move higher after last quarter’s earnings report. You’ll also notice that it held up relatively well throughout November and December. I got long SBUX a week or so ago, trading it with long calls. Today, on a day where the S&P is currently down 24 points, almost 1%, SBUX is up 1.81%.

What does that make it? A Phoenix.

Now for the trade ideas…

I’m looking to make McDonalds (MCD) and Home Depot (HD) as my next two Phoenix entries. I like these for long-term stock picks, as well as short-term, directional runs into earnings. Check out the charts below.

McDonalds (MCD) Daily Chart

Notice the Fibonacci cluster on this chart, along with the 195-minute squeeze. It’s also held up well with the overall trend, and rose quickly after the downturn in December.

Home Depot (HD) Daily Chart

 

Home Depot isn’t as strong as MCD, however, this idea has more time to work, as the earnings report isn’t until February 26th. I’ll keep an eye on this for an entry with long calls, however I did start building my long stock position today.

If you’re catching on, you may also have noticed that I added Fibonacci Time Ratios to my charts. This happened after the class I taught this weekend with Carolyn Boroden, the Fibonacci Queen, along with JC and Henry. Thanks to John and Henry, I finally figured out how to run time ratios in ThinkorSwim.

I’m constantly looking to improve my trading game (like learning how to run time ratios), and my hope is that I can help you do the same in your trading journey. We’re in this together after all.

It’s so important, no matter how long you’ve been doing this, to continue learning, and adjusting your strategy in ways that make sense to you. I have a constant thirst for knowledge and I’m always learning. I’m so grateful to my mentors and love being able to pass on their knowledge to all of you as well.

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