Don't Be a Bagholder - Have a Plan

Once and a while I like to spend time scrolling through my social media feeds to see what people are saying or doing in certain stocks. Not for information or ideas but for a sample of investor psychology. I do this when the "froth" comes out of a hot industry or momentum stock that has recently put in a top. 

What I've been seeing lately is people "buying the dip" on individual stocks that are down 50% or more by confirming their bias with other bullish investors, analysts, news reports, etc.

This can be extremely dangerous as "cheap" can get a lot "cheaper" especially in momentum names that recently experienced a blow-off top. It may take years for these stocks to recover and many will never see those highs again.

I've traded many momentum stocks along with PFT Premium members over the last few months but we were clear on what they were, trading vehicles only. We also had a plan in place BEFORE taking a position.

Some of these stocks we traded for big profits are down 75% or more. 

I have a feeling that many of the "traders" who chased some of these names higher without a plan have now become "investors". These accidental investors could be holding for quite some time in order to get back to breakeven. 

A good example of this was the bull market in 3D printing stocks in 2013.

One stock in particular that I was having success trading was DDD. I remember selling this stock in the low $90s the same day an analyst put a $110 price target on the stock. The stock never got above $100 and a few months later was trading below $50.

The orange lines show how the slope of price continued to increase until it went parabolic and formed a blow-off top.

Eight years later and the stock is 75% below its 2013 high despite a massive rally earlier this year.

Before you go bargain shopping because a stock is selling for a lot less than it was a few months ago make sure you understand what you are purchasing and why. Or better yet, have a clear plan for your exit if the stock keeps falling. Don't become a bagholder.

What I'm Watching Next Week - Oil & Energy Stocks

One month ago the rally in crude oil and the related stocks (XLE) came to an abrupt end.

In technical analysis, this is called "overhead supply" or "price resistance".

As it stands right now, oil is trading in the middle of its recently established range.

At some point, it will rally and make another attempt at $70 or break lower and test the mid $50s.

I'll be watching closely for trading opportunities around these price levels.

Bitcoin Update - Price Compression Eventually Leads to Price Expansion 📈📉

I posted this chart of bitcoin in my last email with the following comments:

The bulls and bears continue to battle with the price of Bitcoin hovering just below 60K. So far every rally attempt gets met with selling. 

This price compression will eventually lead to price expansion but in what direction? This consolidation is happening within a massive up-trend so it would make sense to put the odds in favor of the bulls. However, when it comes to crypto you can expect big moves in either direction.

Let's see what happened...

I don't know what the future holds for bitcoin but I do know that the masses are now involved.

Institutions have warmed to bitcoin and are taking positions. There are futures contracts for bitcoin and ethereum, and companies are allocating some of their excess cash to the cryptocurrency.

My guess is that bitcoin is starting to "mature".

Like any new industry that eventually becomes more common and accepted it could potentially experience less extreme price swings moving forward.

Maybe we are entering a period of time where bitcoin trades within a range and becomes a less volatile asset class?

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