Higher Highs and Trailing Stops

The market closed slightly lower on the week. Attribute meaning of that however you wish; many are saying it's because of Greece, interest rates, quarter-end rebalancing, or summer seasonality. But regardless of all the news flow, the SP500 sits less than 2% from all time highs.

SP500 weekly

Despite the down week we had 9 of 13 holdings post new highs and 7 of the 9 made new weekly closing highs. Our Portfolio continues to outperform against the broader index. 

Charts In Focus

We saw 3 significant upside breakouts this week that need a closer look.

FB

 Facebook has signaled a new buy trigger this week, fortunately we are already quite long this name so no additional action is needed. However had we not been holding shares, I would be a buyer here.

Price resumed to new all-time highs on a gap higher open to the week. Volume expanded on the breakout as well signaling that big buyers are present at these levels. Both of my confirming indicators suggest a bullish stance here as well. Relative Strength vs the SP500 broke its year long downtrend and moved to all time highs. The Weekly MACD signal has crossed over bullishly after a false move in early March. This bullish crossover has occurred as the MACD has pulled back over the past 18-months, yet never violated the Zero line. This shows the stock has simply been consolidating within a larger uptrend and that the long-term trend is still intact. Success is certainly not guaranteed in the future, but all big winners display this same pattern.

Last week I said that I wanted to see FB move away from this trading range soon or our positions would become suspect. Ask and you shall receive! Shares rallied nearly 10% and it appears much more upside is possible.

Fundamental metrics are phenomenal for Facebook: (As per Finviz.com) They have grown EPS by 83% this year and are expected to grow at a fairly steady rate of 25-30% over the next five years. The metric I like the best is that they grew Sales at 41% Q over Q, and have had 74% Sales Growth over the past 5-years.

The fundamentals are in place for strong growth and the price action is telling us the market wants higher prices in the future. With the new high breakout we can trail stops marginally to a weekly close below 78.50.

UNH

 Our oldest current holding, UNH, has seemingly broken above its 4-month trading range this week on strong volume. The Obama Care ruling sent the Healthcare sector soaring this week and UNH was certainly a beneficiary. This is simply what leading stocks do; they rally for multiple months, consolidate near the highs and eventually breakout and resume another leg higher.

There is no reason to trail stops yet as our current placement remains the lowest closing bar in the last 10 weeks. But this is exactly the kind of action we wanted to see from this consolidation. We have held positions for our Portfolio since Spring of 2013 and just goes to show that you can never truly know where you are in a trend. The best we can do is ride these market leaders until the price action tells us to step aside and protect capital.

DIS

 Disney continues to shine and followed through on last week's expansionary bar with a gap higher rally this week. While the SP500 closed at the lows of the week, DIS closed almost on its high tick. This market environment continues to reward a select group of stocks and we need to pay attention to where money is flowing. Volume has increased each of the last two weeks and shows a healthy rotation into this name.

Determining trailing stops and stocks that are trailing higher

The key to trailing stops successfully is to keep them far enough away from the current price action to let a winner run, while also keeping the exit point close enough to keep open losses small to protect gains. 

I employ a trend approach, this amounts to tracking higher highs and higher swing lows. After a new high is made, the prior swing low becomes the new trailing stop level. Because simply if the recent "higher low" is violated the trend of higher lows is invalidated. Using the recent swing low as your stop location is based on the theory where after a brief pullback, buyers stepped in at those levels. With a strong trending stock the expectation is that on the next pullback new buyers will come in even quicker and continue the uptrend. Should they fail to do so often suggests selling pressure has overtaken buying pressure and a new trend may be developing. 

Through my experience and research I have found for a longer term strategy that the lowest close of the last 10 weekly bars (50 Day lows) works well for giving a stock adequate room. It also allows for tight enough stops to protect gains in the inevitable event the trend changes. Often this 50 Day low occurs very near the 20 WMA. 

The combination of a rising 20 WMA and 50 day swing lows offers an ideal exit point for intermediate-term trend trading. 

*Note: This is an exit strategy that tends to work best for large cap stocks. For more volatile small and mid-cap stocks, shorter timeframe stops are often preferred. 

Let's take a look at a few stops that can be trailed in our Lg-Cap holdings this week.

Stops trailed higher:

SBUX

 SBUX continues to press new highs. With each surge higher we are able to ratchet up our stop point. While it certainly has been an amazing run for Starbucks in 2015, this is not an unprecedented move for the stock. The last rally from late 2012-2013 lasted 12-months and +48% from breakout to peak. The current move has been in place since the 11/28/14 breakout. That puts us at almost 7-months and a +34% gain . So even using recent history as our guide this could continue for some time yet without being unreasonable. 

Most people can't fathom a rally like this and continuously call for a correction as the stock is "overbought". I prefer to stick to reality and the concept that the most bullish thing a stock can do is go higher. We bought it because our strategy suggested it would go up, now that it has there is no reason to get itchy and pretend that we know where it will end. 

The recent swing low at 49.78 can be our new stop location as that was a key pivot location for the stock and the rising 20 WMA has now caught up to that level. Even if the stock were to tank from here, we are looking at roughly a 25% gain regardless at this point. It would take a 10% correction from current levels to invalidate the trend for my timeframe. 

GILD

 GILD has been a beast since May. The stock made new all-time highs this week, but faded some into the end of the week. A pullback here would not be a shock and anything above the prior swing low and support at 103.85 would be seen as constructive consolidation. With this trailed stop we are now basically on a free roll as our entry was $1 above. Should we see a sharp reversal from here we would be exiting with very little loss of principle capital. I'll take that; the leading stock in the leading sector (Biotech), growing EPS 107% Q over Q and 300% EPS Growth this year. Sales Growth Q over Q is above 50%, a 1.44% dividend yield and a forward P/E of only 10 makes GILD an incredible candidate for future returns. Considering we are taking little to no risk in the stock makes this a no-brainer holding going forward. 

GS

 GS finally saw a little selling come it this week, but the trend is so clearly higher and our new stop location is above our entry point. Its another situation where we are risking no principle to see where this move can go. 

AIG

 AIG managed to push higher on a gap move this week despite the ominous looking bar from last week. This is why I don't tend to give much credence to any one trading bar and defer to the longer-term trends in all cases. We can edge our stops slightly higher this week to just below our entry point at 56.99. 

It should be an eventful, holiday-shortened week of news ahead of us: Greece's debt deadline, the June Non-Farm Payroll Report due Thursday, and no Friday trading due to the 4th of July Holiday. These events will no doubt move markets, but it is not our jobs to predict what these outcomes may be. While many are very negative and cautious on the near term, the market continues to present leading opportunities. It is our job to follow the market's lead regardless of the noisy news flow we will be bombarded with. 

You don't need to know how the Greece bailout will turn out to be profitable in the market. You don't need to correctly guess the Payroll number or the market's reaction to these events. What we need to do is simply react to what happens either way. If the market's take the news poorly and trigger our stop levels, we will exit those positions. If the market responds positively we will be positioned in the current leading names and they should continue to display leadership. 

Successful investing is not about predictions and opinions. Successful investing is about reading the market and positioning your funds into repeatable, high probability situations. Your ideas will not work every time, but if you continuously put yourself in low risk/high reward positions you will be a big winner in the end. Our profitability is not dependent on this particular round of trades we currently hold. What matters is the next 1,000 trades we take and sticking to a system that rewards correct ideas and eliminates incorrect ideas quickly. 

For up to date charts throughout the week Follow on Stocktwits and Twitter @ZenTrends.