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Flush Draw: How to Beat the Algos When They Run the Stops

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As I teach my Millennial son some good investment strategies for winning in the stock market over the long-run -- like sector allocation, which/how many ETFs to buy, tax-deferred vehicles, time horizon, etc -- we also discuss how to survive the toughest game in town: short-term trading.

I can't imagine a better time to be helping him learn than right now in the market's historic run to new highs, as all kinds of new manias surface from Cathie Wood's new paradigm at ARK Invest, to Roaring Kitty followers in GameStop (GME - Free Report) and "Chamath the SPAC King" playing new pied-piper tunes of riches to beat Wall Street hedge funds.

The long-term approach is best summed up in my recent podcast, video and articles where I invited Zacks Director of ETF Research, Neena Mishra to help me pick the top 5 ETF for Millennials...

GameStop Lessons: How to Become a Savvy Investor with ETFs

5 Best ETFs for Young Investors

Within that wisdom is a basic idea that "Corrections Happen -- and you have to be there for them!" to create the best long-run gains.

So it is too with trading. Because when the market wants to hand you gifts of "great stocks on sale," you are almost always better off focusing on those opportunities than chasing 5-10% gains near the highs.

I have been warning about the coming correction since early January, as outlined here...

Technical Forecast: Frothy With a Chance of Complacency

But this month, as the correction accelerated, I thought it was even more important to get specific about the rules and tactics to win in this environment.

How exactly does one beat the algos at their own game during a correction -- when most large institutions aren't selling their stocks, but stealthily adding to their positions when great stuff is on sale?

Here are some simple rules to write down and keep handy...

1. Markets run to emotional extremes: great news for smart, early buyers (who can take profits), and for those who have FOMO (who can have patience)

2. Momentum works both ways, but typically it's stairs up, elevator down

3. Fast flushes will happen as algos run and trigger all the stop-loss orders

4. You have to be ready mentally and "be there" to buy (LIMIT and MIT orders help a lot)

5. Deciding in advance the levels where you want to be long is key to execution

I could almost add a preliminary rule of "Identify market froth and potential weakness and anticipate how far it could plunge" but that's sort of the work you learn over time.

The main idea is that you need to have cash and then make a plan for when inevitable corrective action shows up.

In the video that accompanies this article, I go over how we recently planned to take advantage of market weakness.

I use the plunges in The Trade Desk (TTD - Free Report) , Advanced Micro Devices (AMD - Free Report) , and Square (SQ - Free Report) as examples of stocks getting "wrecked" by algo stop-flushes.

And all you had to do was be patient and put in "low-ball" bids to capture great stocks at great price levels.

Here's an example of the strategy and tactics coaching I gave my subscribers on March 4...

Weak Hands Must Be Flushed
Posted on 3/4/21

TAZR Traders

Today's 3 Buys...

TTD: Added at $640. The lows were just under the $620 bottom of my buy range after the alert so you had plenty of time to do better.

Shopify (SHOP - Free Report) : Bought 5% allocation at $1130. Lows were under $1120 after alert so you had to be fast to grab 'em near the support I highlighted.

NVAX: Added at $158 amidst news that was probably known yesterday by many market players: the EU medical authority has chosen to review the Russian Sputnik V vaccine before NVX-CoV2373.

These buys reduce our CASH from roughly 60% to 45%.

If you review the charts I showed you Friday night (2/26), you'll see the market dipped BIG right into my BIG GREEN BUY ZONES for both the SPX and NDX.

And I'm still licking my chops at all the great bargains coming down this month! This has been my plan since I first described the market's technical forecast as "frothy with a chance of complacency."

Even since that early January call, the flood of retail buyers with no clue about valuations -- or corrections -- drove prices even higher.

Mr. and Mrs. Market have a lesson to teach those kids. And weak hands must be flushed for the bull market to continue.

I'm still looking at AMD, FSLY, SQ, and BABA as the Nasdaq 100 (NDX) got close to my first correction level support of 12,250 today.

Today's low of 12,315 marks nearly an 11% correction thus far.

From here, we could see a decent bounce to 12,600-700 and then another stop-flush to 11,800-900.

The thing about the "flushes" is that they are very quick and you have to be ready. If you've been with me for a few years, you already know this.

The NDX doesn't have to go all the way to its 200-day at 11,650ish.

But it well could since the SPX has just begun to enter correction territory and could fall another 5-6% to hit 3550 -- a fantastic place to buy!

My plan is to deploy HALF of our CASH (20% of portfolio currently) on the next flush to roughly NDX 12,000 and SPX 3700.

And then deploy the other HALF of our CASH if things get uglier to NDX 11,700 and SPX 3500.

For that lower flush, we'd probably be using leverage with TQQQ.

Enough battle scheming for tonight.

If you didn't know, or couldn't tell, I love these volatile, fear-driven periods as much as riding good stocks higher in a bull stampede!


(end of March 4 TAZR commentary)

Then on Monday, following the reversal of Friday's rally, I made this battle plan...

Flush Draw: Still Waiting On the Weakest Hands
Posted on 3/8/21

TAZR Traders

Today's (2) Trades...

MGNI: Bought 5% position at $38

PERI: Bought 5% position at $17.50

This brings our CASH down to 25%.

Since the Google news last week, MGNI is down 30%.

PERI is down 35%, but that 52-week high near $26 also coincided with the company's raised guidance on March 2, which prompted the big PT raises toward $30.

So my strike today was partly motivated by the discount I believe has been created in their valuations.

Again, these may not be the exact ponies that are going to take off 5-10X in the digital ad revolution like Digital Turbine (APPS) did last year.

But this is a space I want more exposure to with small and mid-caps now that TTD is the big leader. Another player I'm looking at is PubMatic (PUBM).

Novavax (NVAX) Update

We had a nice rally going today up above $185 and then more global bickering between the EU and Russia about what vaccines should be used, and where, added tension to stocks already in risk-off mode.

There were also rumblings about the late February story that South Africa favored the forthcoming JNJ vaccine vs that from NVAX.

What I can't figure out though is that the agreement reached to sell nearly 1 billion doses of its coronavirus vaccine to COVAX, an organization led by the Coalition of Epidemic Preparedness Innovations, Gavi, and the World Health Organization, should be worth at least $10 billion in revenue.

That's why analysts at Jefferies and B. Riley raised their PTs to $310 and $397, respectively.

I'll keep going over the data and news flow to figure it out. Meantime, follow me on Twitter @KevinBCook for all the virology data I re-tweet from a dozen different scientists and physicians I follow. And especially follow Dr. Eric Topol @EricTopol for his frequent data sharing and interpretation.

Correction Update: NVDA, SHOP, TQQQ Opps!

My title tonight is about being ready for the big flushes.

Clearly, this market is not done exploring the downside for over-valued growth stocks with the Nasdaq 100 (NDX) falling back 3% today.

Another big flush looks like it's in the cards.

And here's my 2-step plan to beat the algo stop-hunters at their own game...

1) Pick securities to place BUY LIMIT or BUY MIT (market-if-touched) orders for.

2) My top suggestions are these for 5-10% allocations depending on your current positioning and aggressive-conservative market posture...

TQQQ: Between $60 and $65

SHOP: Between $960 and $1010

NVIDIA (NVDA - Free Report) : Between $420 and $450

TTD: Between $540 and $570

AMD: Between $65 and $70

Let's see how the week unfolds.

(end of Monday evening commentary to TAZR members)

Obviously my hopes of another "fast flush" plunge were denied with a big Turnaround Tuesday gap-and-go 4% higher!

But the principle and practice remain the same: Be Prepared for Bargains When the Market is Volatile!

Disclosure: I own shares of NVDA, SHOP, TTD, SQ, BIDU, NVAX, MGNI, and PERI.

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