Trending Stocks: MNST

Monster Beverage (MNST)

Chart for MNST

Over the next 13 weeks, Monster Beverage has on average historically risen by 7.1% based on the past 32 years of stock performance.

Monster Beverage has risen higher by an average 7.1% in 20 of those 32 years over the subsequent 13 week period, corresponding to a historical probability of 62%

The holding period that leads to the greatest annualized return for Monster Beverage, based on historical prices, is 40 weeks. Should Monster Beverage stock move in the future similarly to its average historical movement over this duration, an annualized return of 191% could result.

June 7th Daily Market Comments

Although the Dow continues to trade strong today, profit-taking is evident in the other indexes. It will be important for the Dow to maintain its strength. If it starts trading lower in correlation with the other indexes pulling back, the profit-taking/consolidation would produce more prospects of profit-taking occurring over the next few trading days. Currently with the Dow trading positive, it can be assumed that money is just shifting versus pulling out of the markets. Stay long but continue to have defensive stops in place.

 

Trending Stocks: MDGL

Madrigal Pharmaceuticals (MDGL)

Chart for MDGL

Over the next 13 weeks, Madrigal Pharmaceuticals has on average historically fallen by 6.5% based on the past 11 years of stock performance.

Madrigal Pharmaceuticals has fallen lower by an average 6.5% in 8 of those 11 years over the subsequent 13 week period, corresponding to a historical probability of 72%

The holding period that leads to the greatest annualized return for Madrigal Pharmaceuticals, based on historical prices, is 36 weeks. Should Madrigal Pharmaceuticals stock move in the future similarly to its average historical movement over this duration, an annualized return of 125% could result.

June 6th Daily Market Comments

The slow uptrend in the markets illustrate strength when one index consolidates one day while other indexes are trading positive, followed by the next day where another index consolidates as the others continue higher. This demonstrates there is no exuberance coming into the uptrend, profit-taking followed by more buying. The steady uptrend of the market is providing good profitability in observable candlestick buy signals.

Bulls, Bears, and Beauty Pageants

Bulls, Bears, and Beauty Pageants
By Bill Johnson

Stock traders have many choices of investments and an even bigger selection of technical indicators. However, they all share one thing in common: They rely on price movement, or volatility, for profit. The bigger the volatility, the bigger the price moves, the bigger the profits for the trader who is right – and the bigger the losses for the one who is wrong.

Options allow you to hedge volatility – or profit from it – by using a variety of strategies that allow you to partition risks and rewards in ways that cannot be done with shares of stock. That’s a big benefit, but to make it work, you can’t just approach the options based on whether you’re bullish or bearish. You must realize understand the role of volatility. However, even volatility poses a problem, as the price of options contracts don’t depend on whether the crowd is bullish or bearish. The price depends on what the crowd thinks the crowd thinks. To understand why, we need to look at an unlikely starting point – how to judge a beauty pageant.

The Economics of Beauty Pageants

In 1936, renowned British economist John Maynard Keynes explained price fluctuations in his masterwork, General Theory of Employment, Interest, and Money. There he drew the analogy that traders in a financial market make decisions much like participants of a beauty contest run by a local London paper at that time. The paper would run 100 photographs of women considered to be the most beautiful. Readers were asked to choose a set of six faces and everyone who picked the most popular face won a prize.

If you wanted to participate, it seems you should look through the photos and pick the six faces you think are the prettiest. However, a better “judge” wishing to win the contest wouldn’t use such a strategy. Instead, that reader will choose the six faces he suspects will be considered the prettiest by most of the people. But why stop there? A more sophisticated “judge” will take this reasoning into account and attempt to second guess the other judges’ second guessing – and so on and so on. Each level attempts to predict the selections based on the reasoning of other judges. As Keynes stated, “It is not a case of choosing those [faces] which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be.”

Keynes believed a similar process creates volatility in the stock market. Traders don’t price shares or options based on their fundamental or technical view, but instead on what they think everyone else thinks the value will be. It’s also why speculative bubbles can form. It’s not irrational to buy a “grossly overvalued” stock – if you feel everyone thinks the price will be even higher in the future. Asset valuation is a constantly moving target and that’s why prices can be so volatile.
This poses a problem for traders. As suggested by Keynes, to succeed at trading, you must be good at “mob psychology,” but that is a never-ending cycle of second-guessing the second-guesser. That’s the difficult and inconsistent way to invest. However, there’s a second choice that gives you more flexibility and consistency in your results, a choice that allows you to manage the inherent unpredictability of prices.

The Option Advantage

Options are the only assets that allows you to customize the risks you’re willing to accept. Most stock traders cut profits short because of the fear of holding the position. Trends generally last much longer than expected, and traders end up missing out on the many great rewards they set out to capture. Options help you to safely capture the missing money.

For instance, if buying call options, you can roll your call option up as the stock price rises. Doing so, you can roll your profit and loss curve above zero, as shown by the green curve in the chart below:

By having the entire curve sitting above zero, you can’t lose – but you may do better. On the other hand, what if you’re more fearful the stock price may fall? You may choose to leg into a backspread as shown by the blue curve. By entering a single trade, you can shift from the green curve to the blue curve. By sitting on the blue curve, you can make more money if the stock price falls, but it comes at the expense of fewer profits if the stock price rises.

If you want more profits if the stock price falls, you can shift from the green to the red curve. There’s now more profits if the stock price falls, but you have limited profits if it rises. The possibilities are endless, but you must understand the option advantage to easily switch as stock prices – and volatility – changes.

Richard Buckminster Fuller once said, “When I’m working on a problem, I never think about beauty. I think only how to solve the problem. But when I have finished, if the solution is not beautiful, I know it is wrong.”

Volatility poses a problem for stock traders. Options provide a beautiful solution.

Good Investing!

Bill Johnson, Steve Bigalow
and The Candlestick Forum Team

P.S. Bill Johnson’s Alpha Trader Options Course takes you from the very beginning, step-by-step, through an exciting journey into the world of options. At the end, you’ll have the necessary knowledge and confidence to start investing and hedging with options. In addition, you’ll have a rock-solid foundation from which to continue your options education.

Click here for more information about Bill’s Alpha Trader Options course, now with multi-pay options!

June 5th Daily Market Comments

Although the Dow and the transportation index are trading lower, the NASDAQ is still showing a very convincing bullish chart pattern, staying well above the T-line. The S&P 500 continues to trade above the T-line. This combination indicates no major change of investor sentiment in the overall market trend, merely shifting from one sector to another. Stay predominantly long but long positions still have to be scanned for strong bullish candlestick signals. Specific sectors are working, i.e. retail stocks.

 

June 4th Daily Market Comments

Today’s positive trading in the Dow has brought it up above the T-line after a few days of supporting on the 50 day moving average. This puts it in correlation with the other indexes all trading above the T-line. This provides more evidence that the overall market trend is in an upward direction.

Trending Stocks: MDGL

Madrigal Pharmaceuticals (MDGL)

Chart for MDGL

Over the next 13 weeks, Madrigal Pharmaceuticals has on average historically fallen by 8.3% based on the past 11 years of stock performance.

Madrigal Pharmaceuticals has fallen lower by an average 8.3% in 9 of those 11 years over the subsequent 13 week period, corresponding to a historical probability of 81%

The holding period that leads to the greatest annualized return for Madrigal Pharmaceuticals, based on historical prices, is 37 weeks. Should Madrigal Pharmaceuticals stock move in the future similarly to its average historical movement over this duration, an annualized return of 117% could result.

June 1st Daily Market Comments

The NASDAQ Is showing the most compelling strength in the market, the J-hook pattern breaking out above the resistance level with Doji gap ups. The S&P 500 shows strength with kicker type signals. The Dow is hovering between the 50 day moving average and the T-line but illustrating there is no consensus as far as selling pressure. The overall market trend is still bullish based upon the indexes trading above the T-line.

May 31st Daily Market Comments

The Dow continues to show indecisiveness but note that the low of Today supported right on the 50 day moving average. The NASDAQ is showing the most strength, currently trading positive after yesterday’s Doji gap up above the resistance level.