Opportunities Are Developing as Rotation Action Hits Again
Here is an example of some trading tactics I’m employing on a new position.
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Breadth is running slightly positive on Thursday, but there is aggressive rotational action taking place again. Semiconductors (SMH) are the primary victim with a drop of more than 3%. High-beta growth stocks are also struggling with the CapForce IBD 50 ETF (FFTY), formerly the Innovator IBD 50 ETF, down 1.2%.
The money coming out of these groups is going into “safe” sectors such as pharmaceuticals, retail, and energy. Apple (AAPL), Microsoft (MSFT), and Google (GOOGL) are benefiting from the drop in chip stocks as investors believe it will decrease pressure on profit margins.
This is a tricky trading environment as there is very little trending action. The volatility is good for some pure day-trading but if you are looking to build position trades it is very difficult. The whipsaws will stop you out if stops are too tight.
Trading Tactics
Yesterday I discussed Electrovaya (ELVA), which jumped sharply higher on news that Amazon (AMZN) had entered into an agreement to potentially take a large equity stake in the company, which has been a supplier to Amazon for many years.
In my discussion of my approach to the stock, I stated: “The important thing is to be incremental. I believe this works longer term but it is going to be volatile and could pull back deeply.”
The stock is pulling back deeply Thursday, which is annoying if you jumped in too big, too fast, but if you are taking an incremental approach, as I suggested then, it looks more like an opportunity than a setback. The stock has had two sizable target increases from analysts so I’m not concerned about fundamentals.
According to TheFly, Raymond James raised the price target to $22 from $14 and keeps a Strong Buy rating on the shares. The firm believes Electrovaya has taken “another important step in validating its technology while materially expanding its addressable market.”
Also, Roth Capital reiterated its Buy rating with a $20 price target after the company announced a new supply agreement with Amazon. “Investors should scrutinize Electrovaya’s Amazon agreement in the context of Ford’s (F) energy storage system agreement with EDF using CATL technology, which added $10B-plus to Ford’s valuation.”
This fundamental research gives me confidence to keep buying incrementally as the shares bounce around. I’ll try to catch some quick bounces for profits but will also look to build a core longer-term position. I’ll trade in various time frames and buy and sell incrementally.
This is a good example of how I approach most trades. I don’t expect my initial buy to be ideal and I want to take advantage of volatility. I will continue to learn more about the stock and my confidence in fundamentals will influence my level of aggressiveness.
There are many other stocks that are thinly traded and being unfairly punished and I’ll be looking to trade them aggressively as we move closer to earnings catalysts.
At the time of publication, Rev Shark was long ELVA.
