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Some Lessons From Our Monthly Conference Call

November 20, 2018

On October 30th we got more constructive on Indian stocks and put out a massive post with stocks to buy. Given that many of these trades were counter-trend in nature, we expanded on our last trade management post during this month's conference call, discussing strategies that are helpful to know in any environment.

The first lesson is on respecting profit targets. Just as it's important to respect our risk levels and take a loss when the market moves against us, it's important to take profits when the market moves in our favor. This is particularly important in a mixed market environment like we're in today.

A good example of this is our counter-trend trade in Interglobe Aviation Ltd. After prices got back above 811.80 to confirm a failed breakdown and bullish momentum divergence, we got long with an upside objective near the middle of its 2-year range (1,080). The trade worked in our favor and just about hit our upside target, so now what? Price and momentum have both improved significantly, however, the stock still needs to work through all of the overhead supply at this level. So, rather than risk giving back our 30%+ gain in the stock hoping to catch the last 10 points or another move to the upside, we should be taking profits and reevaluating.

Click on chart to enlarge view.

While it's entirely possible that prices could continue to consolidate at current levels and break out again, action in the broader market and in the stock itself is suggesting that's the lower probability outcome. Additionally, that is a totally different thesis than the one we acted on originally. When the thesis changes, our positioning should too.

In this case it changed from bullish, to neutral, and now we're waiting for more data to determine if that neutral stance should shift to bullish or bearish. We don't have enough evidence to answer yet.

The second topic is on failed moves that DON'T lead to fast moves in the opposite directions. The failed breakdown and bullish momentum divergence combination was what sparked many of our counter-trend trade ideas on October 30th, but some of those setups didn't work.

In the cases where we don't see quick upside follow-through from this pattern, like Motherson Sumi Systems, the market is usually telling us that there is still an overwhelming amount of supply in the stock and that we should be trading in the direction of the trend.

Changing your mind on a trade and immediately flipping the position is one of the hardest things to do, but in stocks like this one we're happy to do so since it fits our process. Just as the reward/risk was skewed in our favor and risk was well-defined on the long side, it is now well-defined on the short side. As long as prices are below 147 we can be short, this time trading with the underlying trend and targeting the 2016 lows near 96.

Last up is trading the same name in opposite directions over different timeframes. We traded BEML Ltd. on the long side over the last three weeks, but we've met our price target near 740. Now the data is suggesting we should be short the name we just sold!

Momentum didn't get overbought on this rally and prices are now retesting former support below a downward sloping 200-day moving average. We've defined our risk and can be short as long as prices are below 740, with a target down near 545 where we originally bought it.

The first thesis in this stock was for a short-term counter-trend move taking advantage of a short squeeze, but in the second trade we're acting on the primary trend which is down. In both cases the data suggests the reward/risk is skewed in our favor and risk is well-defined, so there's no reason we shouldn't play both sides.

It also highlights the importance of knowing who you are as a market participant. Without a plan, it's impossible to know if both, either, or neither of these trades are appropriate for you. For those of us with a plan, we have the flexibility to take opportunities that fit our process as they arise.

Thanks for reading and let us know your thoughts!

If you enjoyed this post and want access to this month's full members-only conference call, consider starting a 30-day risk-free trial or signing up for our "Free Chart of the Week".

Allstarcharts Team