Hey, Ross here:
Hope you had a wonderful Christmas with your family. Here’s what I got for you on the first trading day of the last trading week of the year.
Chart of the Day
Despite heavy selling across the board, cosmetics company e.l.f. Beauty (ELF) is one of a small handful of stocks weathering the storm and holding near its highs.
This display of relative strength is something you want to watch for. It identifies the names likely to run the fastest if and when the market turns around.
The traditional play on a stock like ELF would be to buy at $57 when the stock breaks out to new highs.
But given the higher-than-usual failure rate of breakouts in this bear market, I am constantly looking for alternative entry points to get me in sooner and allow me to risk less on the trade.
Notice the failed breakout on December 12 where the stock broke through resistance but pulled right back into its base. This was followed by a “shakeout move” lower – but ELF quickly returned to the $55 area.
Instead of waiting for a new breakout to all-time highs, you could buy on move above $55.
A bullish engulfing candle followed by an inside day (stock trading inside the previous day’s range) is a high-probability long setup.
Not only would this get you in the stock at a lower price and increase your gains if successful, but it also decreases your risk since your stop loss is closer to your entry price.
Insight of the Day
Adaptation is easy to talk about – but hard to execute
Markets are always shifting, and you have to adapt accordingly. Today’s trade idea is a perfect example – in this kind of market, the traditional breakout strategy may be suboptimal.
But while it’s easy to say you’ll adapt, it’s much harder to do. Too often, I see traders (even experienced ones) stubbornly refusing to make any changes to their strategies whatsoever.
This is not to say that you should hop from one strategy to another – that would be a mistake. But you should be willing to make changes on the go, while still holding true to the strategy’s fundamentals.
That’s exactly what I try to do. For instance, although I use a decades-old formula handed down by the world’s best traders to spot potentially profitable “price anomalies”, I don’t take the formula as gospel.
I adapt it according to today’s markets – and the results have been astounding. I go into more detail here.
Editor, Stock Surge Daily