Buy Oversold, Sell Overbought

Estimated read time: 3 minutes, 57 seconds

In this week’s market recap email

1. Market recap

2. Skills/methods I used this week

3. What's in and what's out of my portfolio

What Happened This Week

One month returns:

• S&P 500: Negative

• Nasdaq: Negative

• Russell 2000: Negative

• Top holding position US Dollar: Positive

I know I know, we say it every week. US Dollar this, US Dollar that. Is it the sexiest asset allocation? Hell no. Is it smoking basically everything else that trades YTD? Hell yes.

And that's what the Dollar will do as the economy starts to decelerate and inflation peaks. 

So spoiler alert, we will continue seeing decelerating data which is only more bullish for the Dollar. Hold the flippin' bag, literally. 

What else was fun and exciting this week? Anything happening over seas that we should note?

Oh man, you know when a chart crosses one of those dashed lines it means we are getting serious! But in all seriousness, the dumpster fire that is Europe is basically the same set up that is going on in the US.

Decelerating growth and demand. Inflation out the ass. Central banks trying to raise interest rates to combat inflation when in reality they are tightening into a slowdown.

That ain't it, chief. 

Teaching Moment

Buy low, sell high

We've all heard the expression before; fundamentally, that's the motto we are trying to use when trading. You don't want to be left with the feeling of FOMO and chase something after it goes up.

On the flip side, you don't want to puke something at its lows.

With the help of a common trading mechanism you can start to better understand this concept and trade with confidence. That is, the mechanism of overbought vs. oversold.

It's fairly straightforward, a security that is overbought means that, relative to past performance, the price has been getting a lot of buy action and a reversal could be near.

An oversold security is one that gets dumped in much larger magnitude and the bottom (hate using that term, but stay with me) could be in.

The Relative Strength Index (RSI) is a popular tool used in charts to signal these events; the math used in the RSI calculation (check it out on Investopedia if you're really curious) can be combined with another concept called Stochastic Oscillator which tracks price momentum over a defined period. Behold, the Stochastic RSI.

Setting a time period will help closely resemble a securities trend; essentially, we want the reading to be concerned with recent activity, not what happened 15 years ago (if applicable).

Stochastic RSI will read a number from 0 - 1.0

Oversold = a reading < 0.2 - these are signals to BUY

Overbought = a reading > 0.8 - these are signals to SELL

Anything in the middle is simply not significant to the reading and could be perceive as 'normal' price changes.

StockCharts.com shows Stochastic RSI nicely - let's take a look at this measurement and how I've been trading around one of my favorite positions in my account currently, SunOpta $STKL:

On the bottom chart, oversold conditions (< 0.2) are highlighted nicely in red. These are BUYING opportunities, pictured by the green circles.

As soon as overbought conditions (> 0.8) are met, that's a SELL signal on my end pictured here by the red circle.

*Despite a Stochastic RSI showing oversold for positions like $QQQ, I am ONLY using this metric for sectors/style factors that support the current macroeconomic outlook (i.e. not Tech right now)

Rise, repeat. This is "buy low, sell high" at its roots.

But to me it's Buy Oversold, Sell Overbought.

In The Account | my top holdings 

1. $UUP - US Dollar

   1. As I stated at the beginning, "hold the flippin' bag"

2. Utilities

   1. This position down right asserted itself during a week of mainly red across your screens. And in the face of a 10 yr curve that's going ballistic! (Utes like falling rates)

   2. Talk about a sector you want to be (and stay) long in: $XLU, $SO

On The Radar | positions I want to build / sizing up

1. Health Care, Staples, and Dividend

   1. Let's get one thing straight, I love these sectors for the current and future macroeconomic outlook. But this week they teetered on a trend breakdown, so I proactively put stop-loss orders to cut them loose if they slid further.

   2. It triggered for health care ($PINK) and Dividends ($SPHD), currently hasn't for Staples ($PBJ). Very tight leash.

   3. Signal looks much better for single stock Staple names I am still long: $GIS, $BJ, $STKL

Off The Grid | removed positions / short selling opportunities

1. TECH

   1. What a week to be short $QQQ an $XLK - taketh what the market giveth and book some wins here

   2. Getting a great opportunity to short specific tech names like $NFLX, $META, $GOOGL

   3. Netflix is about to head into a comp period against Squid Games...the #1 most watched Netflix show of all time. Good luck - I heard that new Manti Te'o documentary was good though!

2. Europe

   1. All of it. Short the entire continent.

3. Commodities

   1. With slowing inflation comes falling commodity prices...

   2. Oil ($BNO), Metals ($CPER, $SLV), Bitcoin (yes it's a commodity)

   3. Commodities are inversely correlated, theoretically, to the Dollar. And everyone knows how much we love the Dollar!

Until next week....

-BW

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.