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Ep 90: Trading Around Events, Brexit, Fed, Earnings

Hey, this is Sasha Evdakov and welcome to another episode of let’s talk stocks, and in today’s episode, I’d like to talk a little bit about the events, different kinds of events, there’s a lot of discussions about Brexit.

But I don’t want to just talk about this Brexit deal coming up, I want to talk a Little bit more about also earnings, which we’ll have coming up a little bit later, the feds announcements that even happened, and just large scope events that occur in the market place and how you should trade as these events come up.

Today’s video will probably be a little more condensed and short, I’m actually on my backup computer right now, yes I have two computers in order to run and manage my trades, and that is a risk management thing, maybe I’ll give you guys a tour a bit later about the computers and why I have the set up that I have, but for the time being, I’m going just to keep it a little bit short here and just give you some insight about different kinds of events.

As you get into trading more often and you start watching more the market day to day activities, you’ll slowly begin to be aware of the different events that come up in trading, so as you have, for example, the fed minutes get released at Janet Yellen, or the fed share start speaking, you might have earnings that come out, or even things like this that are big where the market talks about it like Brexit, you slowly start becoming aware of all these potential effects in the market place.

Similar to how a lightning storm also can affect your computer, and this is one of the reasons why I always have a second computer.

Unexpected events are difficult to plan for

In this case, we have these different events that have effects that happen on your stocks. Even things like Tesla right here that had this event coming out, just not too long ago, that was going to purchase out the solar city, which had some movement in the stock or the market place so that you can see it really in the Tesla stock, much more than the solar city stock.

These kinds of events are a little bit difficult to control because with the Tesla event you had no clue that this was happening, it just happened the next day and boom, the stock gets wiped out.

These unexpected events are a little more challenging to plan for, so what I always like to say, as you’re just getting started in training, one of the best approaches to managing and reducing your risk, and one of the easiest ways until you go ahead and modify it to your liking, is to only take off half, take off a third, take off a quarter, take off 5%, 10%, 20%, whatever amount you want in order to reduce and minimize your risk.

Most traders lose

Even if we’re moving in an upward fashion on a stock, and it just appears like it’s going to the moon, nothing can stop it, that is precisely when you want to take your profits. That is when everybody else is screaming to buy, if you’ve been in that stock for a little while, that’s when you take your profits, because if you know and understand the majority of traders lose, and if the majority of traders are positioned on that buy side, when that rug gets ripped out from under you, and the selling starts to happen, then you’re in serious trouble.

And this is why I always say sell into strength, whether you’re long the stock, then you would sell it to the upside, and if you’re shorting the stock, then you would sell it into strength as that stock goes in your favor, meaning you buy back some of your shares.

You don’t know what will happen in the market

That is because you don’t know what’s going to happen in the market place exactly, you never can be sure, you have a probability or chance of success, there’s always the statistical probabilities, for example, getting outside of standard deviations or the probability of a market moving 2 to 3 standard deviations beyond its current price.

You do have those probabilities that do play out, but you never really know exactly what’s going to happen tomorrow, you have kind of a 33.3 chance of success. Because the market can stand still, it can move up, or it can move down, but it’s going to move one way or the other so that you could say its a 50/50 chance.

Reduce your position size

To protect yourself on moves like this that are unexpected, you typically want to sell part of your position to reduce your position size.

As you get into events like the Federal Reserve event, so if we look more on the broader scope of the S&P 500, as you get into more of the federal reserve events, earnings events and into other events like this Brexit event that now we have. Those events you know and understand that they’re coming up, these events are coming up soon.

And when you have an expected date for those events, unlike the Tesla who was a little more unexpected, then those kinds of things, you can plan for a little bit better.

The Tesla events and also things like drug trials where a patient dies, bomb explosions, those kinds of things, it’s very tough to plan for.

For the events that have some release coming up, they’re a little bit easier to plan for, now that doesn’t mean you won’t lose money, or that doesn’t mean that the risk is less, it just means that you have an opportunity to plan against that risk.

How were people positioned in the past?

What’s going on as we look into these different events, what I‘m always watching is the buy side of things and the sell side of things as well as how far extended are we.

If we’re talking about Brexit here with the UK leaving the European Union, I’m still looking at how people are positioning for that move, but also how they were positioned in the stock market before.

Even though today we may have had a pretty significant rally about 27 points if you look on the S&P 500, about a 26 point run here on the S&P, and if you look at the Dow Jones, right around 230 points, so we’re coming into the highs. So today it appears like people are very confident about the move to the upside.

The way I like to look at it is, what was happening in the past? How many traders were trading at that same price level to what direction? So as I start looking across at that same price level, so here if we look at the SPY, you can see that we look at the volume, we have about 19.9 million, if you look at the box on the left side of the screen, you’ll see that we have 19.9 million shares that were traded, which is a fairly substantial amount in anticipation for this move, one way or the other.

But if I look a little bit to the left of that, which is not too recent, right around that same price level, to the downside, there’s 113.8 million, which is only about a week or two ago. And then I also had 117.7 million even to the downside.

I’m looking and evaluating these different price levels at what was traded and how people were trading at those price levels because that gives me an indication of how people were positioned in the past.

This could mean a few different things, so as you start looking and watching these things, you’re now starting to get into the analysis of, number one, are people positioning to cover based on their past position? Meaning, are they reducing their risk as we’ve talked about selling into strength, or taking some profits off?

For the people that were short, is it them taking the profits, or is it people getting long into the position?

From my perspective, the way I see it if you look at the volume on its own, just based on the recent week timeframe, for the shorter term trading, it appears to me, only from that SPY of course, that people were more so covering rather than positioning long. Or hedging on the part of their short, meaning they’re concerned that there could be pop to the upside.

Of course, doing some more digging, you’ll have to dig a little bit more, on the IWM which trades very heavily, and as you start looking at this, you start seeing a few different things, and you can stretch things out to get a clear picture.

You can see that even though we had a very significant rally today, the last couple of weeks, we only had kind of three days, we had one day, two days, if you look at it on June 15th, we’ve had June 20th and also June 23rd, which is today of rallies, or pops or green days.

Overall, between the last 14 days or 10 trading days, 7 of those were red. And if you look at the volume, comparing the last few bars on the bullish days, or the green days, the volume was lighter.

Sometimes it’s better to wait

What a lot of traders were doing, because we had Janet Yellen speaking, was actually just waiting, they’re waiting patiently, sitting in cash, because cash is also a position, sometimes you don’t need to be in a trade instead it’s better to be in cash, waiting for things to evolve, digest and then you get in it one way or the other, whether you short it at the highs over here, at the 118.57, if you’re trading the IWM.

If you’re looking at the RUT, you have a few different areas here. You have previous swing points, right around 1200, right around that level, you also have 1190 also as another few swing point levels there as well.

The volume on the RUT is a little harder to see, so I use things like the SPY and the IWM to check the volume, but looking at the SPY you also notice that the volume, you actually had a little bit more of a pop in volume for a bullish day, it was actually on June 16th 2016.

Balance your positions

There’s a lot of things that are happening here, coming up with the Spanish vote on Sunday, you also have a market rebalancing act tomorrow, and then you have the vote on the Brexit that will be released, so usually when I get into these events, I typically lighten down on my position, or I try to be very balanced in my positions, depending on how many positions I have.

Let’ just say I was short at these highs, then as we get into more and more events, and events start to unfold on events that I’m aware of are coming up, I try to be a little more neutral, or a little bit balanced, have a few positions to the longs, have a few positions to the shorts, I try to be a bit more balanced if I have many positions from before.

If I didn’t have as many positions from before, what I can do is reduce some of those positions. So there are a few ways to approach it, number one, you can balance them out by putting on a few additional positions, such as, right now there were people putting on more bullish bets, so if there were a lot more shorts, they would go ahead and put on more bullish bets right now to rebalance those things.

The other approach is to take some profits, so if there was a lot of shorts, what they would do if they would make some profits and that would cost stock prices to rise higher, now of course you could be a little more positioned one way or the other, meaning you could just only be more bullish now because there’s a high chance that they’re actually going to stay, but sometimes here’s the problem with positioning that way as well.

The market always looks for balance

What I found over the years is when you actually have everybody on one side, remember, when everybody is on one side, eventually it has to tip the other way, because there’s just so much weight in the other direction, so you get to that point where you have everybody being bullish, the market, then all of a sudden has to go to the bearish side, because you just have such a stretching effect, there’s just so much weight that it can only go down, because if everybody’s position on one side, for sellers to come in, you have to have then selling pressure coming in, in order to balance it out, it’s just the natural way that the market works.

And the same thing on the downside, if you have a lot of sellers, just if you take, let’s say, in January this major sell-off, if there are so many people on the other side, and prices are so far extended to the downside, then all of a sudden, everybody that’s selling, 90% of the people were selling, now you got the rest of the people, or some of the people now stepping in and say: I’ve already sold and made my profits on the short side, why don’t I step in and now it’s more favorable to actually go long because we’re so far away from those highs again, so again, the market’s looking for balance.

Think about your risk

And when you get into these events, you have to always think about your risk, and what is happening underneath the surface.

The people on TV, the people on the news, reading reports, all that stuff, you could read it for days, hours, months, years, before the event even happens and it wouldn’t really give you an edge, you might think it does, but most of the time, it really just doesn’t give you an edge.

If you are actually one of the hedge fund managers, maybe, and you were taking polls, let’s just say outside of the voting, or something like that, or you were doing some voting polling before the voting began, and maybe you spend a few million dollars ahead of that in order to do your research and analyzing the people to get a reasonable estimate of what would happen.

Then, in that case, you might be able to have an edge or advantage. But, if you’re a retail trader, knowing these things ahead of time is very difficult.

Positive or negative news doesn’t always affect the market in the way we expect

Whether it comes to earnings, whether it comes to Janet Yellen, whether it comes to Brexit votes, any of these things is much more difficult, and that is just simply because you don’t know which way it’s going to go, and a lot of times, even just like with earnings, when earnings are significant, sometimes the market, or that stock will still sell off, and that is just because the expectations for the next quarter or the next year get reduced, or maybe because the price was already so high in the stock.

And I’ve seen the other way around, where earnings are wrong, but then the expectations were right, or maybe some CEO twitted out something in a positive manner, so the stock goes higher.

Just because there’s positive news o negative news, it doesn’t mean that things will go to the upside or the downside, remember it’s about the perception of that news.

But as far as trading these types of events, as you get into them, just like what we had with Yellen here and there you usually want to be lighter on your position.

For me, I was mostly short there, and then when we get into this area, and we start popping, and people get a little worried, you start reducing your position.

You reduce your position, or you take profits in the strength, which is a reduction of your position, or you balance out your position, you can do it through hedging, you can do it through options, there are a few different ways, it just depends on the size of your positions.

If you look at the weekly, again, we’re getting to all-time highs. And this is actually in moments like this, where you can have breaks of these all-time highs, and you may get things like this Brexit deal, new presidential candidate, because what we could do is pop a little bit higher here, pull back a little bit, and then during the presidential race then break through it.

Not only look at the news but instead look at how the market reacts to it

You can get higher prices, but again, we are slightly extended, relatively if you look at the volume on a weekly basis, we still have one more trading day to go, and that is something that you have to take into account, is how we have been coming into this level? And this level has been a substantial resistance level, can we break it? We can cut it.

But usually, to break something, and continue to hold that break, you’d want more volume, can we get it? We can get it tomorrow, we will see if we get it tomorrow, but we need to watch not just what happens, not just the news, not just what’s being said, but how the market reacts to the news.

Because it’s not about what happened, it’s about how the traders act and behave on that news, how the traders act and behave and how they put their money to play based on those results.

Be aware of the pumping that happens in the market

That’s really what it comes down to, but as far as for you, as a retail trader. If you’re just getting started, if you’re kind of new, if you’re a beginner, you’re normally coming into these kind of things, you don’t want to leverage up, because there’s going to be a lot of hype, there’s a lot of pumping that happens, a lot of people will tell you to buy, a lot of people will tell you to sell, and there are sentiments, because what they’re trying to do is they’re trying to position themselves, so that way you inflate the prices, and then what they’ll do is sometimes as those things pop, they’ll sell it into strength, so they want you to do the buying, because they already got at lower prices, so they’re just trying to bump it higher, so that way they can get out.

You need to be aware that there’s a lot of pumping that happens, a lot of pumping, some manipulation, of course, does occur, so be mindful that you are looking for watching how things react and you usually want to give it about a good half hour to digest.

Give it time to digest

Usually, it’ll take for something this large on this scope, where it’s pretty significant, I would say anything with the fed releases, give it a good 30 minutes, give it a good hour for fed releases.

Earnings, give it a good day or two, and it comes down to volume, if you see significant volume coming in within that first 20-30 minutes of that trading day, then you might want to give it a little bit longer, sometimes half a day, sometimes a full day.

If in that full day you see major wide price spread, and by full price spread what I’m talking about is when you look at significant prices moving, let’s take a look here at, IWM for example.

If you see major wide price spread, and wide price spread is something from the lows to the highs, so if you see a significant move from the lows to the tops, kind of like on this board on February 24th, 2016, then you probably will get a continuation on the second and third day as well, and you’ll see what happened here as well, we got a slight continuation here on February 25th and then the same thing on February 26th a small little counter pull back on the 29th, but then further continuation.

And you notice that the price spread was full on a handful of these bars, if you take a look at the SPY as well, and it’s not going to happen all the time, because it depends on the bigger picture, but let’s look on the weekly for example.

If you have a nice, full price spread bar on the week off, let’s say March 4th, 2016, you have a wide price spread bar, and then you get again continuation and another continuation, a slight little pull back on March 24th and then again a nice bar there.

When you have that, if you have something like that on the daily, you want to give it another one or two days, just like when you look at individual stocks like a Tesla, typically you don’t have a one day move.

Once the selling starts kicking in, and if you’re starting to break critical levels, like let’s just say here on Tesla on 4-29-2016, once that initial move and the volume hits up, notice that volume, you’ll get maybe a counter-trend bounce, but then the stock continues to go in that direction, and it slowly starts picking up speed.

So those things take energy, it takes energy to evolve, and the same thing recently, if you look on Tesla, we had a major sell-off, and then again, you had kind of a follow-through day, there’s a lot of action, if you look at linked in, not too long ago, when you have those large moves, sometimes, because they’re so massive, they take time to digest. They’re popped, and then they take time to understand.

That’s why it’s important that whatever happens tomorrow or any time on events, you give it time to digest, and the amount of time is going to dictate on the massiveness of the move.

On linked in here when we did a major drop on February 5th, it took time to digest for about four months. So it’s always going to take a little bit of time for that digestion.

Let’s just take a look here on Fedex, if we look on the weekly, let’s just say here, we had a pop on March 18th, and then we had a little digestion, we had digestion moving sideways, so there’s always room and time to digest depending on the speed of the move.

If you have Sandisk here, we had some major drops, so we had one major drop on let’s say 7-18-2014, a little digestion for a few months and a pop, and then again, a drop.

When you have another major drop, talking about March 27th, 2015, we digest it, that digestion as slightly upward, but again, this digestion lasted, again two and a half months.

The longer or, the larger the drop, the move, the pop, the more time it takes to digest, and even when we had a pop here in Sandisk on multiple weeks, that digestion right here, we’re still really digesting it, right there. Knowing and understanding how energy moves are significant.

I hope this video was helpful and insightful regarding some news and events and just about what to do with your position for the retail trader, the regular trader, if you have a smaller account, let’s just say less than 10-20 million dollars in your account, then you normally want to be a little more balanced on this, reduce your position.

If you’re trading large, it’s a little bit more difficult to make movements and adjustments in your positions, because your position will be seen by other hedge funds, and you’re going to shift certain stocks around a little bit, depending on your position size.

Be patient

But for the retail folks, the regular people, you want to normally just watch your position size, reduce your position size, be a little more balanced, because those things can whip the market around, and you normally get more whipsawed action, you’ll have to sit on your hands a little bit, be more patient, glue your hands a little bit down or duct tape them.

Because you’re going to get whipsawed events, whipsawed price action, you’ll get a little bit of a drop, and then you get a pop, and it’ll be back exactly where it was, so being patient can be valuable in this business, especially as you get into these events.

And it’s just about watching the risk that you have in front of you and managing that risk by positioning correctly based on your account size.

Stay patient on your positions, watch how things behave and react there, that first hour, because remember, it’s not just about the news, it’s about how traders respond and what they do with their money, and then watch the follow through towards the end of the day, how stocks end, are they ending on a dominant note or are they ending on weakness? And that will give you a little more insight, as well as to where things may be heading.

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