Weekend Review | Bargain Bin Temptations

Trade Anatomy Portfolio 

0.0% MTD | -.32% YTD

Position Summary

0 long | 0 buys | 0 sells

Watchlist Summary

7 candidates



Preservation of capital  is still our primary objective for the portfolio in the current trading environment.  Although the S&P 500 didn't make a new closing low on a weekly chart, it sure felt like it. Many of the leaders which had been holding the weight of the market are finally starting to crack as market liquidations increase in intensity.    

As you can see from the chart above, the main trend line is holding near 1839 on the S&P 500.  A weekly close below that price would result in another leg down.  As noted in past updates, market charts are simply to gauge the overall environment and are the least important aspect of my trading routine. However, trading is always easier when the general market isn't acting as a headwind.  At present, the headwind is so strong that I prefer to stay inside even if it means passing on a trade or two.  

Bargain Bin Temptations

Everybody loves a good deal on the internet or 50% off sales at their local stores.   It's become ingrained as part of our society to always find the next bargain.  However, that mentality rarely works for long in the trading world. It happens everyday, someone thinking that they've got the skinny on a company, therefore the current price couldn't represent the true value.  They see a stock fall from $50 a share to $25 a share and swoop in and buy without a plan to exit if the stock price continues down.   Next it hits $12, and they double down again.   If they are lucky,  the stock finds a base, but the only issue now is that it's usually dead money for several years. While their money is tied up in a non-performing stock, other strong trending stocks have to passed over because their capital is sitting in a stock thought to be a bargain.

Survivorship bias helps create a skewed reality for most investors.  They see Microsoft, Apple, Wal-Mart, IBM, etc., and they assume most stocks over the course of time appreciate in value. Therefore when they are wrong, the assumption is made that the company they bought at a bargain price will undoubtedly make a full recovery and then some.  In my younger years, I was taught to trade with the prevailing trend.  For the most part, I stayed true to this principle. However, as a college student, I chose to take a trade that went against everything that I had been taught.  I chose to take a trade in AMZN after the price had been beaten down and appeared to be a bargain.  My mind was so clouded by how much money could be made that I had given very little thought to what I could lose.  I placed the trade at the open and then spent nearly my entire day in the college computer lab watching the price.  Near the end of the day AMZN was down over 12%, and I'd lost almost $7,000.  Before the market closed, I liquidated my position and swore to myself that I'd never do it again.  That was 17 years ago, but the thoughts of that trade never fade.  

Fast Forward

Over the last 6-8 months,  I've been fielding questions from friends with regards to oil and gas companies.  A large portion of them work or worked in this business.  Two stocks regularly discussed are Chesapeake and SandRidge.  A very good friend, over the course of last summer, wanted to invest in both, but for some reason SandRidge was his main focus.  At the time SandRidge traded at .75 cents a share.  He asked my opinion, and I told him no way.  His immediate response was that it only had to go to a $1.50 to double his money.   My response back was to let me have the money, and in 6 months I'd give half of it back that way he'd at least have something left over when his wife asked about the money.  Fortunately,  he listened, but most people can't resist the temptation of the bargain bin.   As a side note,  he also thought BlockBuster was a heck of a deal in 2010. Below are charts for CHK and SDOC.  The spots highlighted in green are various times when I was asked my opinion on the two stocks.

A Brief Look at Gold | Daily and Weekly Perspective

On the daily chart, gold reversed the trend on 1/6/16 and has been trending strongly higher.  On Friday, it closed above the downward trending line that had been keeping the lid on for the last several years. The question now is if gold will base for a few weeks and set up a continuation pattern or will it head back the other direction.    

As mentioned with the daily chart, the price was able to close above the downward trending line, setting up the possibility that gold continues higher for an extended period of time. With further price appreciation or a minor consolidation, the weekly trend line will turn up and confirm the price action seen on the daily chart. 

Watchlist Summary

At present,  the watchlist is producing a small group of names for observation. Earlier in the week, I mentioned two stocks.  In case you missed them on one of the social platforms, I've included them below. 

Have a wonderful week, and I hope your trading finds you in a profitable position.  

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