Hey There Income Hunters,
I’ll remember this week for a long time.
I knew 2021 would be a pivotal year in the transition to a new monetary policy. And as we entered May, I could sense a change in psychology …
The inflation trade slowly started to take over.
On Tuesday, I wrote that silver and gold finally joined the inflation party and how the narrative had started to shift away from “the Fed is in control” to investors being sick of hearing about “transitory” periods.
Yesterday, I opined how right now is the time to get on the silver express. I noted that I thought it would be today (Friday) on the employment number that we could see a breakout …
Instead, it came yesterday.
Guess what the signal was?
It was the setup in silver.
The most powerful setup is when moving averages converge and money flow coils into a tighter and tighter range until there is a release and a new trend develops.
But for that to happen, you need a macro force — in this case, the massive increase in money supply — and that force pushes money to flow in one direction.
Now that we have a clean breakout, trading the trend along the way is pretty straightforward.
Knowing that, today I want to show you two technology stocks and a consumer cyclical stock that are set up well against their moving averages and are in play for a nice trade.
Stock 1: Adobe (Ticker: ADBE )
ADBE is one of the best stocks you can own. Period.
They had a crazy-good 2020 and we’ll see their Q1 earnings next month.
Now, yesterday was an awesome opportunity to pick up some stock at cheap levels. We had the 50- and 200-day moving averages on top of each
other, meaning price trends of two different time frames converged.
Two things tipped the scale on this one:
- ADBE was below its fair value ($520)
- The trend down to the moving averages was on below-average volume, so the down trend was not as strong as the previous uptrend (mid-March to mid-April)
Adobe was below the 50- and 200-day MA’s most of the day before exploding higher into the close …
That illustrates this point:
When the moving averages are on top of each other, they show areas where multiple timeframe investors are involved, so the moves are more powerful.
I will definitely be looking to pick up some more ADBE tomorrow.
The trends higher in earnings per share (EPS) and sales are outstanding and, as they have every year, ADBE has purchased stock, which is nice for shareholders as it’s a stimulant to price …
Stock 2: NIO, INC (Ticker: NIO)
I was a bit early when I spoke about getting involved in China a few weeks back. Why? Because it’s the one country globally that’s tightening monetary policy …
Although that just builds an even more bullish scenario for them next year — I’m sure they want the economy to peak at the 2020 Olympics in Beijing.
Chinese electric vehicle manufacturer NIO is a great one to watch. It should turn its first profitable year in 2022 — and now we have a great setup to keep an eye on. See below:
Morgan Stanley recently rated NIO as an overweight name, with an $80 target. Nio also doubled their sales in 2020 and they have a strong balance sheet. These are excellent fundamentals that support the case for NIO eventually breaking out to the upside.
This is an easy one to play …
I’d like the stock to fail at the 200-day MA and consolidate below it. Then, once the 50-day MA closes on the 200-day MA, if the stock is able to break above them on higher volume, I would jump on it.
Sometimes, I even like to anticipate this happening and then add as the price gets through.
Stock 3: XP (Ticker: XP)
OK, for the last one, I picked a tremendous growth stock that blasted through the 200-day MA out of a tight congested area as the 20- and 50-day
MA’s converged …
I like to wait and see a stock put in two closes on one side of the 200-day MA, so XP still needs to prove itself. Goldman put its target price at $50 recently, so it’s worth jumping on for a move higher …
As is typical with growth companies, XP leveraged it’s business with debt but as you can see from the graphs below they are producing. Their earnings and sales growth supports their valuation. They are a fairly large Brazilian company and year-to-date they have added 1 million new
The future is bright, as studies show that between 1974-2019 emerging market equities rose nearly 10x when the dollar fell versus when it rose.
Bring It Home
Although I’m not a huge fan of moving average crossovers since they are a lagging indicator, I do think they are very helpful as a setup scan that you
can focus on when looking for a big move.
The 50-day MA is also very useful as an area to add to a long position in a stock that is trending higher. This will be ideal in the weeks ahead with silver, gold and miners.
Have fun trading after what should be an explosive employment number. And as always …
Live and Trade With Passion My Friends,
Option Pit Head Income Trader