Last week, I wrote to you about FAANG earnings, and I noted the volatility that this week in earnings season can cause. Now, at the end of the day, I always think it’s better to be overly cautious rather than overextended. The consequences of the latter are much worse.
However, in this instance, I feel like I was wrong in the best way. I was cautious looking for a potential pullback due to volatility.
We got volatility — but it came in the form of a blast off to the upside…
Trading is about recognizing patterns, and building consistent habits that’ll last you throughout your trading career. It’s also about utilizing caution when necessary while understanding that each situation in trading is unique (though it may follow a larger theme).
Whenever you miss out on a move, you always need to ask yourself if you were following your rules. The rules that make you a consistent trader, rather than someone betting at the horse races. I can answer that question and say yes, absolutely.
What about you?
Let’s talk about technicals…
Utilizing Fibonacci Extensions
This week, FAANG earnings were explosive to the upside, on an already extended market.
What do I mean when I say extended?
I like to use Fibonacci retracements and extensions to determine average market movement. The retracement levels tell me where resistance is, and the extensions tell me where I should have my targets.
Check out this Microsoft chart below, where I’ve drawn my Fibonacci levels to indicate these areas:
The 50.00%, 61.8%, and 78.6% red levels show you where price typically finds resistance. Generally, it’ll hover around this area before a catalyst causes it to break through.
The 127.2%, 161.8%, and 261.8% areas are profit targets. The highest probability target is the 127.2%. This is generally where I take profits. If the ticker trades up to the 161.8%, I consider it an excellent move, but not highly likely. The 2.618% extension is highly unlikely. Generally, if you try and hold onto something until it reaches this level, you’ll likely just give back all your gains.
These are the same extension targets I go off of on the S&P, Nasdaq… really, everything I trade. So, when I say the market is extended as a whole, it means it’s highly unlikely that it’ll go higher.
Nasdaq — Daily Chart
This week, Mr. Market showed us highly unlikely.
What does that mean for me? I was wrong in the best way.
I’d rather be flat in a highly unlikely situation than get creamed when the likely happens, the pullback. I’m also very bullish this market. So the continued move higher and strength in earnings this week fits entirely into my thesis and continued method of trading.
The Power of Earnings on the Market: MAAFANG
That being said, let’s talk about why this happened. I point again to Microsoft and Adobe, who I am going to include in my own FAANG acronym (let me know if you think it’ll catch on).
As I noted last week, Microsoft hasn’t gotten the attention or respect it deserves for a long time, and it needs to be regarded as the market leader that it is.
Thanks to one of our readers, Kyle, who sent me this suggestion — I’m going to call it MAAFANG now. Microsoft (MSFT), Adobe (ADBE), Amazon (AMZN), Facebook (FB), Apple (AAPL), Netflix (NFLX), and Google (GOOGL).
Microsoft: The Phoenix with a Trillion Dollar Valuation
When AAPL and AMZN both hit their trillion dollars valuation numbers, it was the kiss of death… for both of them. It was no sooner that they hit these numbers that they gave up 25-30% of their market cap in the steep decline that came last fall. MSFT was in the race, and it took a hit last fall as well, but nothing compared to the hit the rest of the so called FAANG stocks took. Throughout October, November, and December — particularly in January — Microsoft showed relative strength, the ability to swiftly recover, a strong technical pattern, and solid fundamentals. It was, and is, the perfect Phoenix.
Microsoft — Daily Chart
All the while, everyone’s looking to Apple and Google, while ignoring MSFT making new all-time highs on the year, over and over again. Microsoft is like the runt of the pack, the little lion that isn’t that ‘exciting’ to talk about because it’s not making explosive moves.
All the while, instead of exploding, it’s edging higher, building its strength, taking over not only the cloud, but cloud based subscription models (Office 365), customer service resource management, and is bidding for a major defense contract. AMZN at its $1,900+ price point is exciting but you know what’s more exciting?
The little engine that could, that has shown report and report again, that they’re dominating in this space, and a force to be reckoned with.
Sorry AMZN and AAPL — move aside, to the third publicly traded company to hit a trillion dollars valuation. You know what’s different about this one?
It’s not going to be the kiss of death. It’s only the beginning. I would far rather have the market explode to the upside than sharply correct. Microsoft defied expectations and is paving the way higher, softening earnings recession fears and opening the door to even higher prices in the market.
It’s time for everyone to finally hear that little lion roar.