Tales of a Technician: Silver Linings of a Selloff
May 11, 2021
Stocks sunk on Monday and they’re getting hammered Tuesday morning. While selloffs of this magnitude are never fun for those that have been riding the trend, they do bring opportunity in their wake. Let’s lay some silver linings to the selloff.
Low-Risk Entries for Leaders
Consider who’s been leading the market of late: financials, energy, metal stocks, and industrials. The lot of them were overbought heading into this week. For example, Nucor ended higher Monday marking its eleventh up day in twelve. Did you really want to deploy new trades here? Chasing stocks extended from support doesn’t exactly offer an attractive entry.
I suggest creating a shopping list of the best-looking leaders. A three to five day retracement could create attractive buy-the-dip setups. Here are a few of the ones on my list: NUE, STLD, GS, HD, FDX, BRK/B, XOM, GDX, FCX.
Bargain Hunting
Growth names are getting thrashed. Eventually, many of them will be tempting buys at deep discounts. You’ll find most of them in the technology and biotech sectors. Just as I suggest compiling a list of stocks exhibiting relative strength to buy on the dip, I also encourage you to track whichever growth stocks you’d like to own long-term. Here are a few of the ones on my list: AAPL, AMZN, GOOGL, FB, MSFT, ZM, CRM, ARKK, TSM, QCOM, AMD, and ADBE.
The Power of Scaling In
There’s no need to be a hero when trying to bottom fish beaten-down names. Rather than piling in all at once, try scaling-in. If you want to accumulate 99 shares of a stock, then split it up into three purchases of 33 shares over time. Some might average down at lower prices if their initial purchase was too early. Others might average up as the trend reverses higher and new resistance levels give way.
I’m partial to averaging lower, but sometimes you nail your first entry and don’t get the chance to buy more at lower prices. For those who purchased growth stocks before today, I suspect you’re getting your opportunity to add more at an advantageous price.
If you’re wondering how long to wait or how much cheaper the stock price needs to be before adding, there isn’t a single correct answer. I usually require the stock to drop another 10% before buying more, but I’d also use support to better fine tune the additional purchases.
Take Qualcomm (QCOM), for instance. Suppose we purchased our first batch on April 1st around $136 when the chip maker broke resistance and completed a double bottom pattern. The first opportunity we had to add more was today (May 11th) when QCOM traded as low as $124.77. It offered an approximate 8% discount to the original purchase. Plus, we were testing a major support zone near $125. Adding size before today wouldn’t have provided a great enough sale to justify buying more.
Now, Qualcomm could still go lower. If it does, we might be willing to buy even more when the next support zone is found, wherever that may be. From a discount perspective, we would need to be down to at least $115 to $110 to warrant accumulating more.
VIX Spike
The final silver lining of this selloff worth mentioning is the concurrent jump in implied volatility. Fear is breathing new life into options premiums. And with it comes bigger paydays and wider profit ranges for strategies like bull puts, naked puts, and iron condors.
If you’ve been complaining of paltry premiums, then panic is exactly what you want to remedy the problem.
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Great article Tyler. Thanks for sharing.