Bigger Picture

My daily Filter This! post will be added to the blog, instead of directly to the activity feed. Following are those prior to today:

March 20: Today, that one thing is “patience.”

A lot of stocks peaked yesterday into a “Three-Day Surge” setup. Its resolution is so surprising, because it catches so many people thinking the exact opposite, since so many people were so recently DOING the exact opposite. The good news is that stocks don”t tend to attract that much buying interest without justification. The bad news is that justification might be largely reflected in the price.

Three-Day Surges resolve in all sorts of ways. Some take quite awhile to recover and resume their rallies, some bounce back quickly. Some never do, as the third-day reactions can be very cathartic, forcing buyers to look more critically at the sector and discover some pretenders are among them.

So, today, filter this: An indication of a stock”s underlying strength will be how quickly its rally resumes. But even the strongest need/deserve a few days of rest before kicking it back into gear.

I”ll be monitoring for pullback targets, and will get those to you as patterns allow them to be calculated with confidence.

March 21: Today”s one thing is expiration.

The third Friday of every month is “option expiration.” Today is also a quarterly expiration, called “Quadruple Witch,” for its inclusion of most financial futures (indexes and bonds), and options on both stocks and futures. So, what?

Except for the few cannabis stocks that have become optionable (e.g. GWPH), this shouldn”t influence our space, right? Well, not directly. But indirect influence can be worse, because it is sneakier.

Broader market trending is a product of optimism and pessimism. Broader market trending also produces optimism and pessimism. If today”s expiration were to trend down (which is distinctly possible, despite being indicated to gap up), the pessimism it breeds will inhibit people from buying speculative cannabis stocks — especially ahead of two days of illiquidity (when the stock can”t be sold).

Sometimes broader market pessimism can help the cannabis sector. Recall this year”s start, when the broader market was beginning a big drop, making the cannabis sector more attractive in comparison. But that scenario probably won”t repeat.

So, today”s Filter This is weekend. Oh, it”s tonight”s filter, too. But that”s another story…

March 24: Today”s one thing is…contrarian.

A stock”s price trend is the process of developments eventually convincing a majority of the company”s success, or its failure. When the vast majority is in agreement, then only a tiny minority remains that could yet be convinced of the same thing. Like a game of musical chairs, suddenly “the music stops” and price begins falling when the market discovers that demand (buyers) has shrunk.

Monitoring for these situations is contrarianism. Last week”s plethora of thee-day surge setups was exactly that. Many stocks had rallied sharply in a very brief time. More and more buyers were convinced that prices were significantly undervalued. Fundamentals weren”t being reported as improving so rapidly. Rather, rallies went into hyper-drive as buyers made their decisions based on direction instead of on future value.

Even without supply (sellers) increasing, the rallies peaked. And then they began reversing down. Contrarian analysis searches for setups that have become similarly lopsided. Last week”s buyers aren”t necessarily wrong about the future success of those marijuana stocks they drove sharply higher. They were wrong about the present value of that success.

On the way up, prices rose dramatically because rising prices began outweighing news as what convinced more and more to buy. Guess what: Contrarianism cuts both ways. On the way down, falling prices can become equally convincing to sell. And not just sellers, but reporters and analysts. Here are two stories that greeted the weekend:

http://www.fool.com/investing/general/2014/03/2…
http://www.usatoday.com/story/money/markets/201…

Those “overbought” situations probably aren”t yet fully corrected. Some of those big performers might not recover, at all — not deserving to rally on their own merits, but swept up in the sector”s scattershot euphoria. Risk isn”t gone entirely, and never will be, but it”s less.

Get a few more stories like those, the perpetually nay-saying writers screaming “told-you-so” (ahemcodyahem). That contrarian scenario would be equally capable of lifting price back up. Just convince enough “weak-handed buyers” to sell, get negative opinions everywhere you turn, and then the bottom will be in.

March 25: Today”s one thing is Rotation.

Capital is not infinite. Except for the Federal Reserve, of course, the rest of us can”t buy every bit as much of every single company that we would want. We must be selective in those opportunities we chase with our limited capital, that money we have allocated to trading.

Everyone is selective in which opportunities they chase. And in which ones they stop chasing. It is not just news stories and press releases that account for some stocks in a sector rising while others are falling. Different companies are more or less attractive at different times, inspiring us to sell a stock that may have surged recently so we can buy a stock that we believe is starting a similar move.

This is rotation. Understanding the concept is important to being a trader. It”s not too difficult. But traders should also always be cognizant of where money is rotating into and out of at any given time, which can change often. Like the wheel of an unstoppable truck, its rotation can lift you up if you catch it at the right time — and at the wrong time, its rotation can roll right over you.

The daily Need To Know video identifies three categories of stock charts:

BO breakouts, confirmations
(Breakouts can retrace before extending, and can be invalidated)
PB pullbacks
(Stalking the next leg”s origin, a pullback”s end doesn”t necessarily resume the rally)
EA early adopters
(Monitoring a developing pattern, not assured of resolving favorably or ever)

Today”s coverage is:

DEWM BO
EAPH BO
ENRT BO
ERBB BO
ICBU BO
LATF BO
MYEC BO
PHOT BO
PMCM BO
SPLI EA
ATTBF PB
BRDT PB
CANN PB
CBGI PB
EDXC PB
EXMT PB
MCIG PB
TAUG PB

AFTERNOON RUSH
Interested near the close in a stock? Post symbols and their questions (please, not just symbols) to this Alert”s comments section. I”ll address those that can be addressed quickly in a 10-minute window that begins sometime after 3:40 ET.
TIPS
I”ll answer those questions for which there might be new info. So, scroll the earlier Activity Feed to see if your answer is already there. If it”s addressed, but you still have a question, then be sure to ask that specific question so I”ll know the older info doesn”t cover it… Thanks!

ICBU — Big downdraft reversing the morning”s probe to fresh highs, back into negative territory. Closing back above .17 would be very bullish. Closing under .165 would be vulnerable to extending down to .10 next. It”s likelier than not to hold, and likelier to have already finished its pullback. But I want to see obvious improvement within the next hour or else I would be flat and not long into the close.

ATTBF — Fresh low came within a dime of the 1.50 pullback target before bouncing. Now testing 1.79 resistance. Decline could resume from here, or from 1.89. Any higher would start to suggest the drop had ended already.
DEWM — Impressive volume on the price surge off this morning”s low. Now a narrowing consolidation is reaching its apex, and back above .0134 on expanding volume would start signaling a break higher underway. Close above .0138 to confirm.
LATF — A favorite from today”s video. There was no excuse to delay breaking higher if the rally was valid, and now this morning”s highs are being probed. Also impressive volume.