Saturday, April 29, 2017

CRHM: Position Review

I received many questions regarding the increased volatility in CRHM this week. This is a position I have been involved with since the middle of last year and would like to discuss my ongoing management of this trade.

To preface, this is a perfect example of what I discuss with members about not chasing extended Monthly charts. When prices begin to stretch well beyond the longer-term trend averages the likelihood of an adverse retracement increases substantially. The proper time to get involved with a long-term uptrend is after prices have rested and are near the trend average.

 A lot of traders get caught up in the Daily movements of stocks and assume after a 3-week pullback that the stock is in strong posture to continue in the desired direction. However without assessing the longer-term trends they often are entering a position that has much higher risk than they are preparing for. In this game managing risk is of paramount importance, knowing when a stock in the vicinity of "high risk" can go a long way to reducing that initial risk. This is not to say that momentum cannot continue and the stock cannot become more extended, it certainly can. But in the market we are not forced to trade, we can wait for our pitch, it is not necessary to take an increased risk for the chance that this particular stock continues to defy the odds.

In my experience and testing it is not the strongest play to ignore long-term posture of the stock even when entering for a shorter-term trade. Unless you are a highly experienced, highly skilled, and very short-term trader, most often returns will grind to a halt because of chasing stocks that are due for a period of longer-term consolidation. Stock trends ebb and flow, depending on your timeframe that can mean the difference between a normal trend digestion and a shakeout due to increased short-term volatility.

Key point #1 to effectively manage risk and trade fast growing stocks: Don't chase extended Monthly charts

This is the first rule I consider when entering a new position; has the monthly chart rested and coiled near the longer-term average OR has price expanded beyond its prior base support, leaving a significant amount of "air" between price and the trend average?

According to my method of trading longer-term growth stocks, CRHM has presented 3 places to enter at the lowest risk/reward. Only three times since the IPO has this stock offered the "right pitch" for me to strongly enter with the best odds of success.

The optimal entry point revolves around a tight consolidation as price moves into the rising 20 Month SMA. This combination gives a relatively close stop and the coiled spring for a "liftoff" move.

Key point #2: "re-balance" position size as the longer-term trend extends.

Something I do to keep risk in check with stocks that have since run strongly from prior consolidation is to re-balance the position size at certain intervals. As an example I like to keep individual position sizes to roughly 10% of total account. Once a position grows beyond 10% of total equity risk to the portfolio becomes more lopsided to that individual issue. In terms of diversification, if a holding grows to 15% of total equity (+50% appreciation in the position), I will "re-balance" the size back to the 10% portfolio allocation. The intervals I use for rebalancing are +50%, +100%, +200%, etc.

Entry points are shown in Green with "re-balance'' sales shown in Red at +50% and +100% gain. Stops only trail to where viable support has been established. I determine established support once a new consolidation forms and then resumes higher. Currently the most recent Weekly stop is below the 12/30/16 Bull Flag signal at $5.15. Monthly stops remain under the most relevant monthly support established in September 2016 at $3.40.

The theory behind this method is twofold:

1. Continue to allocate the majority of funds toward the strongest risk/reward opportunities (those opportunities that are just emerging from periods of consolidation near the trend average).

2. Keep overall portfolio balance which allows for extended trades to have plenty of room to consolidate without emotional bias in the event of retracement.

Once stocks begin to run vertical, having a way to manage open risk becomes very important for outperforming returns. As prices stretch risk increases, some may argue this point, but its true. As prices consolidate risk decreases. I try to position my funds toward the lowest risk and reduce away from higher risk.

This method allows for a stock like CRHM to undergo a normal correction without making us react adversely in an emotional way. Since the longer-term trend has not been damaged, the position remains valid. But to ignore that prices are at a higher risk of correction places unnecessary exposure onto the portfolio. I never advocate exiting a position entirely due to it simply trading higher, but it is also not required to maintain 100% exposure to a position 100% of the time. Scaling around a holding allows for flexibility and better managed risk for the overall account.

Saturday, April 8, 2017

Quick Observation on This Week's News Events

In regard to this week’s news flow, apparently the market doesn’t think whatever it was that went on in Syria matters for US corporate profits. At the onset of the bombing Thursday evening S&P500 Futures fell 20 points, but within a couple hours prices had completely reversed and were nearly flat on the session. We also saw a softer than expected Jobs Report for March. With the combined military action and weaker than expected economic report I would have expected the market to be lower by at least 1%. That simply wasn’t the case at all as for most of the day prices flipped into the green multiple times and ended flat on the day.

It is some very interesting price action we are seeing. Nobody is committed to selling this market. In the face of bad news on multiple fronts it simply shrugged and relatively strong stocks continued to rally. The recent action overall has been softer for the past month, this “event” seemingly should have caused raucous noise and very volatile trading, yet it didn’t. Be sure to note that behavior. It is suggestive of great strength in the underlying price action.