Chart Source: Poemsview 7th March 2021
The past two weeks probably wasn’t the best for traders who went long as market globally started to pullback. The Nasdaq pullback to correction territory down about 12% since the peak. A correction territory is usually defined as a 10-15% pullback. How far more and how long would this correction last? No one can really tell, but we can shed some light and share some our plans during this time.
Markets came off probably due to some reason like the 10 year yield moving up, and for why Nasdaq came off more than the overall market? It could be funds switching out to more cyclical stocks as the economy improves with an the covid vaccine being rolled out. With the sell down, traders who were over leverage probably got hit and were being forced to close off their positions, algo trading, shortist also joined in the party which made the drop even faster.
So what should we do? Well, it depends on what you are? A trader or an investor? Don’t get these two terms confused. If you do, you might end up with very confusing results.
For an investor, investing in the longer term like 4-5 years time frame. You’ll have to ask yourself, did the company I invest in changed fundamentally over the last two weeks? What has really changed over the past few weeks? Is this an opportunity to scale into your favourite stock? (of course ensure that they are strong stocks, like a good cash flow, positive earnings, good economic moat.) An example would be TESLA. When tesla was trading at a high of $900, were you considering to invest in it? IF you did and TESLA dropped to as low as around $550. Did you think of entering or were you scared? Fear often leads us to think illogically and act irrationally. Ask yourself what changed in TESLA over the past two weeks, did their vision change? Did something bad happen to the company? In such times, relying on your research and conviction is important.
For investing, we usually prefer to scale in in about 4 batches and not move in all at once. Nobody knows where the bottom will be and we can use technical analysis as one method to help us time a better entry.
We saw a nice rebound last Friday and probably a little overdue too. It came off the horizontal support of around 12233 and showed a nice bullish closing, closing above the 100ema. Will the market continue to rebound? The next important level to watch would be around that short term downtrend line which is around 12900. If it can sustain its footing around there we might see a more sustained rebound. If not the downside might continue which might take us down to the 150ema around 12100 then to 11800. A sustained rebound might take us to around 13300 to 13500.
This once again present opportunities for investors to scale in on good stocks like Apple, Amazon, Salesforce, Facebook, Meli and many more.
A consolidation at key support or resistance levels would be more ideal as this is like market storing power or resting before the next leg up.
As for traders, they are concerned with the volatility in the market and having a proper trading plan is important in such a market. If you fail to have a stop loss and keep picking up your contracts then that would not constitute a disciplined trader. Traders take advantage of the short term spikes in the market and are not overly concern if a company is overvalued, undervalued whereas an investor would pay more attention to these points.
So are you a trader or investor? Be clear of what you are so as to have a clearer results.
As for us, we are looking at this pullback to pick up some good stocks for our long term holdings (we’re talking about years ya) and looking to place some short term trades when market have found support.
Will update more in the coming days. Share with us if you’re a trader or investor.