Jun 23

Riding Trends and Managing Risk – $AMBA

$AMBA is a trade that was given to subscribers of my Alpha Capture service on January 7th for entry at the next day’s open. It was exited this morning, June 23rd, for a profit of around 62%.

It had an inauspicious start, a spectacular ending, and throughout there were numerous examples of challenges you face in following trends and staying disciplined, letting a winner run, and seeing it through to the end.

I thought it would be useful to see a record of my posts to subscribers on $AMBA over the entire period. You’ll see the entry, the numerous trailed stops, when I switched to an ATR stop, and finally the exit, as well as some post-trade commentary.

Where it refers to ‘the portfolio’ it’s referring to a $100,000 verified portfolio on Marketfy that replicates trade signals in real time, so subscribers can accurately monitor performance.

The bold type is my commentary here today, setting the scene. The italics are quotes from posts sent to subscribers at the time.

Here’s how it happened:-

It’s 1/7/15 – The market has just had a nice bounce after declining around 4% from its highs in the last week. $AMBA itself has just closed up a whopping 13.5% in one day, and is up 109% in the last 5 months. Would you take that entry? Here’s my post from that day:-

“$AMBA – Now we’ll see what you’re made of! Who’s going to take this signal? I know all logic compels you to think you should wait for the pullback, but the biggest strongest moves are often those that wait for no-one and don’t accommodate your wishes. I try not to overthink it. Try not to look at the price scale if it helps. You might also want to consider that the stop here has to be quite a distance, around 15% away, so to risk our usual 0.5% we’ll only be using around 3% of our capital. At some point it will hopefully consolidate and go again giving us a chance to bring the stop much closer and an opportunity to increase the position. So at this stage, losing that 0.5% of the portfolio would require a complete failure of that breakout, still a fair risk/reward, and it just means we’re in, no need to play guessing games. At some point we’ll hopefully get a chance to increase it, but for now we’ll at least be onboard and a safe distance from the noise.”

“With a last price of $60.00, and a stop 15.55% away at $50.67, risking 0.5% of your portfolio would utilize 3.2% of your capital. For a $50,000 account you would buy 27 shares. Our Marketfy portfolio valued at $99,083 would buy 53 shares.

1/8/15 – $AMBA opens down nearly 2% and the Marketfy portfolio records an entry of 60 shares at $58.90.

2/13/15 – Five weeks later, $AMBA’s follow through proved to be all-too-brief, and after sitting just above its 50-day for nearly three weeks, it eventually broke below but closed just shy of our initial stop:-

“$AMBA – an ugly high-volume break on Friday, but it managed to close just 4c above the closing stop we’re using. The stop was chosen for a reason and perhaps we saw why on Friday. It will be a surprise if it survives from here but you never know.”

 

2/20/15 – The following week, somehow $AMBA has hung on, and again, using a closing stop instead of intraday has kept us in the game:-

$AMBA – I expected to show this the door this week but it somehow held on. If it closes just a penny below our stop we’ll be out the next day, otherwise we stick with it, it’s really as simple as that.”

 

2/27/15 – One week later it’s climbed 11% off the lows ahead of earnings:-

“$AMBA – it feels like we’ve been through a lot with this name without much to show for it so far. I guess we’ll find out more this week with its earnings report. I like to think the 11% climb into earnings is a good omen but as always we’re only going to key our decisions off price. We’re effectively in no-man’s land until this range we’ve endured resolves itself, but on the surface this looks like a good setup I’m happy to have onside going into earnings.”

 

3/6/15 – Two months after our initial entry $AMBA is back at all time highs:-

“$AMBA continues to be one of the more entertaining positions to watch having given us an entry after a 10% one-day move only to see it flounder and come within a few cents of its exit before it rebounded all the way back through our entry level into all time highs. Exhausting. This week’s fireworks allowed us to move our stop to just above the $57 level where the 50-day MA is coming to meet it. Anything could still happen here but earnings are now behind us, and as long as we keep trailing it higher and managing our risk we’ll come out fine either way.”

 

3/20/15 – Two weeks later, $AMBA has continued to move ahead. This is where the open risk can start to climb up until we find a place to move the stop nearer. The open risk is now up to 0.80%, that is, the distance to the stop expressed as a percentage of the portfolio:-

$AMBA – another good week but unfortunately there just isn’t anywhere to move our stop closer yet. We just need to be patient.”

 

3/27/15 – The S&P suffers its biggest weekly decline in two months, slicing through its 20 and 50-day MA’s. In contrast, $AMBA holds up very well. My commentary highlights that this is the kind of environment where people cut back positions as if they’re all market proxies. I don’t do that. I choose each stock for a reason, assess its risk/reward based on its own technical merits, and size it accordingly, so why would I suddenly abandon all of that because of what an index does? I’ll exit $AMBA when $AMBA’s exit is triggered.

“$AMBA – I’m actually pleasantly surprised this held up as well as it did, as I thought with the kind of names getting hit midweek they might take some money off the table on this one, but it rallied back stronger than most on Thursday, briefly testing its 20EMA. I still feel we need to keep our distance on this and let it breathe until a clearer pattern emerges that will allow us to trail our stop higher.”

 

4/2/15 – The market is still going nowhere, but $AMBA makes new highs again, and our stop moves higher:-

“$AMBA – a big week, and another one where we have to give it the room it requires. Our stop is just below the 50-day and the previous breakout level. That’s perfect for now. with a bit more time we can move to just below $68.”

 

4/10/15 – A new high, the stop trails higher again. At this stage it’s up 25% since our entry 3 months earlier:-

“$AMBA new highs and we can move our stop to $64.22, near the 50-day.”

 

5/3/15 – A rough week for the portfolio, falling over 3% as many of our names get sold off aggressively in a sharp pullback of biotech and momentum names, triggering several exit signals. $AMBA however, makes a marginal new high, and now needs to be increased slightly.

“For the first time this week I can thankfully say we have no new exit signals. Here’s how our portfolio stands:-“

“We’re down to nine names, with 33% cash… We also need to increase $AMBA slightly. You can see that since it made a new high our risk rating is back up to 0.50% but the open risk is 0.45% so we need to add an additional 7 shares to bring it back up to the desired level. If it follows through there’s a chance we may be able to move the stop a little higher too, and we may need to increase it again.”

5/4/15 – Marketfy records an additional 7 shares at $77.64, bringing the total to 67 at an average of $60.86.

5/15/15 – Two weeks later, and after a reasonably tight consolidation, $AMBA is on the move again. If you weren’t already long, this would be a perfect example of where and when you could jump aboard. Notice, that even someone entering at this point (it opened the next day just under $80), still could have made a 25% profit with this morning’s exit, even after the huge collapse from the highs. You can never know where you are in a trend. This level also was ‘too expensive’, ‘way overbought’, etc etc etc.

“$AMBA – it’s not often we get to trail a stop higher in consecutive sessions, but you can see why it was justified in this case. An initial move up that meant we could know a lower low would invalidate, and then the follow-through today resuming the longer-term uptrend. That’s a really clean move, and I like the fact that some extra volume accompanied it.”

 

5/29/15 – Two weeks of ‘straight up’ go by and the stop can now be moved to the breakout level. The position is now up around 50%, and yes, I’m holding it into earnings again. It’s from this point that a lot of bearish voices start to get louder, talking about valuation, being overbought into earnings. Note the price here is $90. It would go on to close above $126, and even after it collapsed Monday was still as high as $94.

$AMBA – currently our biggest open winner, and we’ve moved our stop up to its most recent breakout level. Percentage-wise that looks like it’s a long way away, but it’s only from 10-days ago, and reflects what a quick move this has had. We just can’t get our stop any closer for now. It reports earnings Tuesday, so let’s continue to give it the room it needs, as that’s exactly how it got to be this big a winner for us in the first place.”

 

6/5/15 – One week later. OK, now it’s getting silly (but great fun). This is the point at which MA’s or previous consolidations are of little use for determining trailing stop levels. When something starts to move like this, just like $ATHN, $ANAC and others have for me too, then I switch to an ATR stop:-

“$AMBA – What a run this is having. It’s getting parabolic now, and we’re going to move our stop up again, from $83.29 to $87.20, which seems absurdly generous still in percentage terms, but it’s as close as we can get, and is where it was only a week or so ago. Eventually it will have a reaction or consolidate, and we’ll have a better handle then on what would be an ideal invalidation point.”

 

6/12/15 – Another week later, and now the stop is moving up every other day. Social media is now rampant with those who think they know exactly when it will end, to the hour and minute, I’m only concerned about how it ends, and that my process has me prepared for it:-

“$AMBA – We’re going to move our stop again, the third time this week, up from $95.66 to $100.37. This could end up being a rare instance where we get stopped with price still above the 20EMA, but I hope you can understand why. In these situations when price goes parabolic, the MA’s are severely lagging, and it wouldn’t make sense to still have a stop at a previous low that coincided with an MA. When something moves this far this fast, we have to use an ATR stop. Inevitably it means that when the stop eventually gets triggered, yes, you would be getting out when the stock is still in an uptrend, but after it’s risen this much, how far could it fall and yet still be in an uptrend? In that regard, an ATR stop is more about risk management than trend invalidation. Imagine if AMBA pulled back sharply, and then went sideways for 2-3 months. After this kind of move it could easily happen, and in that situation I would be very happy to have been taken out, and wait for it to resume and trigger again for us, rather than be held in it for weeks on end waiting for a resolution. In any event, it’s a fascinating situation, and it’s one where by having a disciplined rules-based process you’re not left wondering what you should do.”

 

6/19/15 – The first crack appears. I know it can get crazy and I’m emphasizing more than anything to have a plan and know in advance how you will react to whatever may happen, otherwise you could be a deer in the headlights. The stop is now at $108.50, but that doesn’t mean that’s where you get to exit, it’s just what triggers the exit.

“$AMBA finally had the kind of reaction the shorts have been anticipating for the last 50% of this move, and tumbled to levels not seen since… Wednesday. Joking aside, as we’ve already witnessed, this is a stock that has been doing its own thing, and the causality and rationalizations people will attempt to assign to its price action have no place in this situation. The volume was huge Friday and emotions will play a big role should this come to an end, so we need to know in advance how we will react to what unfolds before it does, in order to protect ourselves from the emotional pitfalls that can present themselves. We’ve been using an ATR stop on this ever since it started going parabolic, and right now if it closes below $108.50 we will exit at the next day’s open, whatever it may be, no questions asked.”

 

6/22/15 – It’s over. And I think one of the key lines from this post last night is that when you look at that chart, it’s only from yesterday’s action that you can know it’s over, not before. That, and how with good risk management, you can have moves like this go against you and it not destroy your portfolio.

“What an incredible ride this has been. But when it’s over, it’s over. $AMBA came crashing back down to earth today and sliced through our stop to trigger an exit for tomorrow’s open. As of tonight’s close we’re still showing a 55% profit on the position.”

“It’s always disappointing when something gives back this much, but look at that chart, and it’s clear it’s only from today’s action that you can know it’s over, not before. It’s just unfortunate it takes such a massive move all at once, and one that goes so far through our stop level, to demonstrate it. But it happens, and it’s when it does that we learn the most important lessons of all.

Look at what happened to our portfolio today. It’s a portfolio of just 11 names, one of which fell 21%, and the portfolio lost just 0.77%, to leave it +15% YTD. Have >20% hits to a single stock ever felt this comfortable to you before? This is where position sizing and risk management are so important.

Before today, AMBA was trading 10% above our stop. It traveled twice that distance today, and as hard as it is to watch something collapse like that, it’s an acknowledgement of the money management rules we invoke that we’re able to sit there and tolerate it.

I will probably write a separate post on this entire trade, as I think there are many good lessons that can be learned from it for others, but in the meantime we’ll take our exit signal at tomorrow’s open and move on.”

—————————————————————————

6/23/15 – The exit, and as is often the case after a severe fall through a stop, there was a nice bounce this morning to ease the pain. When you look at that chart now, it could bounce around here for weeks before it’s clear what the next direction is, and that’s just not my field of operations.

As I suggested in my post to subscribers last night, I’ve already taken the exit and moved on. In that sense it’s just another trade. But it was one I thought worthy of expanding on because it shows so many facets of what I do and what’s involved in following trends and managing risk.

I take entries when they make new highs, the stronger the better.

I only risk 0.5% of my portfolio on a single position at entry. That is, the distance to the stop expressed as a percentage of the portfolio. That means if my stop is 10% away, and I risk 0.5% of the portfolio, it will use up 5% of my capital.

I use closing stops, not intraday. If I didn’t I would have exited this position with a loss of 15%. The other side of that is that a stop isn’t where you get to exit, it’s what triggers your exit. If my stop is 10% away, but I’m risking 0.5%, then I know even if it gaps and runs right through it a further 10%, the hit to the portfolio is now 1.0% instead of 0.5%. I can live with that.

I don’t have price targets. I don’t want to limit my gains, and I don’t pretend to know when a stock will stop going up. I prefer to let a stock tell me when it’s finished trending.

In a similar vein, I don’t ‘trim and trail’, I just trail. Some will look at Monday’s collapse in $AMBA and use it as way to justify taking profits on the way up. But if I had done that since January how much of a position would I have left exactly by the time it’s having its biggest gains? It’s been ‘overbought’ most of its life according to some. How do you know how much to take off and when, if you don’t know how much further it can go, or for how long?

I hold positions into earnings. In this case, twice. If your position size is at a point where you can sleep at night and your timeframe also supersedes the noise generated from such events, then you can too.

It was overbought when I bought it, it was oversold when I sold it. But there was 62% profit inbetween.

There will be some people who think I give way too much back in profits, with a position that at one point was up 100%, but closed with a gain of just 62%. Percentages are fun but they can be misleading. The reality is if your entry is a distant memory the relative gain and loss in percentage terms gets distorted in a big way. If I bought a stock at $2 that years later traded at $100, is it really relevant that with every 2% move my total return is changing by a hundred percent? The fact is the stop was relatively close (for me), at $108.50, and as I said in that final post, until Monday’s collapse, everything was intact. I got my exit. I took it.

Notice that in the portfolio table I reproduced earlier there is nothing that shows when I bought something or at what price. It only shows where it is now, and where the stop is, so I know what my risk is. Whether it’s up 10%, 50% or 100% is irrelevant, and if you’re made aware of it, it will likely affect your judgment. I remove it so I concentrate on what matters, what’s at risk and where am I wrong.

There will be someone who shorted at the top. Well done. There are some people who played the upside and caught the downside too. My hat’s off to you, I can’t do that. But I believe there are probably far more people who tried to short this from $70 onwards, and in particular from $90 onwards on the basis of its valuation, or it being overbought, and they have been carried out before their revelation came to pass. At its peak $AMBA touched $128, and even after Monday’s collapse was at $94, way higher than when most started fighting it. Quite seriously, I feel for you, I really do, because there is absolutely no worse feeling in trading than being ‘right’ about something but having lost money trying to trade it. Trust me, I’ve been there. It’s why I don’t do it anymore.

After doing it enough times I eventually learned to remove myself from the equation as much as possible, concentrate mostly on what I could control, and find something that worked for me.

That’s what I do now. I buy stocks in uptrends and manage risk.

Full analysis and commentary on current signals, as well as entry/exit posts, additional trade ideas, and a comprehensive watchlist is available here.

 

 

 

 

 

 

 

 

Jun 20

Weekend Review and Watchlist

Despite the pullback on Friday, this was a good week for the market, posting the biggest weekly gain in nine weeks, and another good week for the Alpha Capture portfolio, climbing 1.1% vs 0.8% for the S&P, taking it to +15.9% YTD vs +2.5% for the S&P.

The S&P, shown here via $SPY, is now back above its 20 and 50-day MA’s, and just 1% from its all time high.

It’s still finely poised, with the potential for a significant and swift move in whatever direction this deadlock eventually resolves itself, but with the latest sentiment data continuing to show an absence of bullishness, and a huge majority neutral and expecting a correction, I still feel it’s more likely to resume its longer-term uptrend than completely reverse course.

That’s about as much of an attempt to forecast or speculate on future price movement as you’ll get from me, but as I’ve stated before, thankfully we don’t need to predict the market, or even trade the market itself, there are still plenty of individual stocks that are trending perfectly well, evidenced by our continued run of performance, with our portfolio posting a sixth straight weekly gain.

While the S&P remains rangebound, the Russell 2000 and NASDAQ both broke out to all time highs.

 

There were also all time highs in a number of sectors this week:-

Biotech ($IBB)

 

Healthcare ($XLV)

 

Financial ($XLF)

 

Consumer Discretionary ($XLY)

 

In our portfolio this week we exited $BSX for a profit of 14.50%, and increased our positions in two holdings which used up our remaining cash. We were also able to trail many of our stops higher, reducing our overall open risk to less than 6%.

In addition to our portfolio names we had three signals for our trade ideas, two exits and one new entry.

Full analysis and commentary on current signals, as well as entry/exit posts, additional trade ideas, and a comprehensive watchlist is available here.

More or less the same sectors feature on our watchlist this week, but the notable difference is the increase in the number of consumer names, which now account for nearly half the total.

Here’s a sample of 10 of the 30 names:-

$NTRS

 

$OZRK

 

$UTHR

 

$LOGM

 

$RHT

 

$HAS

 

$ORLY

 

$DIS

 

$SBUX

 

$TGT

Full analysis and commentary on current signals, as well as entry/exit posts, additional trade ideas, and a comprehensive watchlist is available here.

 

 

 

 

 

 

 

 

 

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