April 2024 - Trade The Pool - Stock Trading Prop Firm

The Wyckoff Method – Understanding Distribution and Accumulation

Posted on April 29, 2024 by Ophira Top

Introduction

The Wyckoff method is a technical analysis tool developed by Richard Wyckoff in the early 1900s. It is based on the idea that the accumulation and distribution of stocks by large institutions (Smart Money) can be identified through price action and volume analysis. The Wyckoff Method may seem complex at first but becoming familiar with it can be very beneficial for traders as it can be a powerful tool for identifying potential trading opportunities.

In today’s article, we will take a simplified look at the Wyckoff Method as a whole, including:

The basics of the Wyckoff Method,
How to identify each phase of Wyckoff Accumulation and Distribution.
How to trade the Wyckoff Method.

The Basics of the Wyckoff Method

When creating it, Richard Wyckoff based his technical trading method on three basic principles::

The law of supply and demand

The price of a stock is determined by the interaction of supply and demand.
When supply exceeds demand, the price will fall. When demand exceeds supply, the price will rise.

The law of cause and effect

Every price movement is caused by an underlying force.
The Wyckoff Distribution identifies the cause of price movements by studying the relationship between price and volume.

The law of effort and result

The amount of effort required to move a stock price is proportional to the amount of result that will be achieved.
The Wyckoff Distribution uses price and volume analysis to identify the amount of effort that is being put into moving a stock price and predict the result on price action.

How to Identify each Wyckoff accumulation and distribution phase

Now that we know the principles The Wyckoff Distribution is based upon, it’s time to find out how to recognize it on our charts and identify the current phase a stock is in.
Let’s start by saying that the Wyckoff Distribution is formed by four phases taking place during the accumulation as well as the distribution.

Each phase is characterized by a series of specific price and volume patterns. It is by analyzing price and volume that traders are able to identify the current phase of a stock’s price cycle.

Accumulation Phases

A. Accumulation (Phase A): This is the initial phase where smart money or institutional investors start accumulating shares at low prices. This phase is characterized by decreased trading volume and a price range tightening.

B. Markup (Phase B): During this phase, the price starts to increase as demand exceeds supply. This phase is marked by increasing volume and a break above the trading range in Phase A.

Distribution Phases

C. Distribution (Phase C): In this phase, smart money begins selling their accumulated shares to the public as the price reaches its peak. Volume increases during this phase, and the price movement tends to trade in a range.

D. Markdown (Phase D): This is when the price starts to decline as supply overtakes demand. This phase is marked by decreasing prices and volume.

E. Reaccumulation (Phase E): In this final phase, the price stabilizes, and a new accumulation phase may begin, setting the stage for a potential new uptrend.

How to Trade the Wyckoff Method

There are several trading strategies based on the Wyckoff Distribution and, for the scope of this article, we’ll take a look at one for each of the three distribution phases.

Strategy 1: Accumulation Phase

Price has sharply declined and is now consolidating within a narrow range, forming a “spring” or ” rectangle” pattern.

Actions:

Identify the accumulation range and its upper and lower boundaries.
Wait for price to break out above the upper boundary with significant volume.
Enter a long position with a stop-loss below the range low.

Strategy Rationale:

Wyckoff’s accumulation phase indicates that smart money is entering the market at low prices. The breakout above the range high confirms that the accumulation process is complete and that the trend is turning bullish. The stop-loss below the range low protects against a false breakout or a reversal of the trend.

Strategy 2: Distribution Phase

Price has risen sharply and is now consolidating within a narrow range, forming a “top” or “triangle” pattern.

Actions:

Identify the distribution range and its upper and lower boundaries.
Wait for price to break out below the lower boundary with significant volume.
Enter a short position with a stop-loss above the range high.

Strategy Rationale:

Wyckoff’s distribution phase indicates that smart money is selling off its positions at inflated prices. The breakout below the range low confirms that the distribution process is complete and that the trend is turning bearish. Here, too, the stop-loss above the range high protects against a false breakout or a reversal of the trend.

Strategy3: Neutral Zone

Price has consolidated within a neutral zone, characterized by a lack of clear direction or trend.

Actions:

Identify the neutral zone and its boundaries.
Wait for price to break out either above or below the neutral zone with significant volume.
Enter a trade in the direction of the breakout with a stop-loss within the neutral zone.

StrategyRationale:

Wyckoff’s neutral zone represents a period of uncertainty in the market. The breakout from the neutral zone provides a clear indication of the direction of the next move. Yet again, the stop-loss within the neutral zone protects against a false breakout or consolidation within the zone.

Conclusion

The Wyckoff Distribution is a complex and nuanced method, but it can be a powerful tool for identifying potential trading opportunities. By understanding the basics of the Wyckoff Distribution and how to identify and trade its patterns, you can improve your chances of success in the financial markets by adding another great trading tool to your arsenal.

I hope this helps.

IPO Trading – Strategies and Tips

Posted on April 22, 2024May 12, 2024 by Ophira Top

Introduction

In the first part of this article on IPO trading, we learned how high levels of interest, trade volume, and price volatility make IPOs very attractive for both traders and long-term investors alike. We have discovered what IPOs are and become a little more familiar with the process behind them. In this article, we’ll go a little deeper by taking a glance at 5 of the most popular IPO trading strategies while trying to distinguish some of the factors that can make or break an IPO’s chances of success.

5 of the most popular IPO Trading Strategies

Initial Public Offerings present a unique opportunity for traders and investors to capitalize on the growth potential of promising companies. However, it must be said that IPO trading can also be very challenging, as new stocks often exhibit significant volatility and unpredictable movements.

To increase the chances of success, traders must employ effective IPO trading strategies; here are 5 of the most common that have been proven able to yield positive returns.

Key Notes:

5 of the most common IPO trading strategies:

First-Day Pop / Flipping.
Buy & Hold.
Breakout.
Pullback.
Sector Rotation.

The First-Day Pop Strategy / Flipping

The first-day pop strategy (or flipping) capitalizes on the initial surge in share price that commonly occurs when a stock debuts on the public market.
This strategy involves buying shares of the IPO at the opening bell and selling them within the first few minutes or hours. By capturing the initial momentum, investors can generate quick profits. However, this strategy is highly speculative and requires precise timing.

Buy & Hold Strategy

The long-term hold strategy is more suitable for investors with a longer investment horizon than for shorter-time traders.
This strategy involves buying shares of the IPO with a strong belief in the fundamental value of the underlying company and holding them for an extended period, expecting the stock price to appreciate over time as the company grows and establishes itself.

Breakout Strategy

The breakout strategy involves buying shares of an IPO once it breaks above a specific resistance level – typically identified through technical analysis.

By entering a trade after the stock breaks out, investors aim to capture the uptrend momentum and ride the trend as high as it goes.

This strategy requires a good understanding of technical analysis and effectively identifying potential resistance and breakout points.

Pullback Strategy

The pullback strategy is based on the assumption that IPOs often experience a pullback in price after the initial surge. This pullback provides an opportunity to buy shares at a lower price point than the opening price. Traders who employ this strategy typically wait for the stock to decline by a certain percentage before entering a trade.
The pullback strategy can be effective for capturing value in overvalued IPOs.

Sector Rotation Strategy

The sector rotation strategy involves identifying sectors experiencing strong growth and momentum. Traders then allocate their capital to open positions – according to one of the other four described strategies – on IPO stocks across the entire sector, betting on its overall positive trend. This strategy diversifies risk across different industries and can help investors capitalize on emerging market trends.

IPOs represent a milestone for companies embarking on the path to public equity markets. and the potential for great gains for investors and traders, but where some IPOs achieve soaring valuations and set the stage for future success, others stumble under adverse market conditions or internal challenges leaving traders and investors scratching their heads and questioning their decision.

Let’s explore case studies of both successful and unsuccessful IPOs to uncover the factors that influence their outcome.

The Good and the Bad IPOs of the past

Let’s first take a look at a couple of examples of successful IPOs and the factors that most likely have contributed to their success.

Airbnb (ABNB) December 2020

Airbnb’s launch into public ownership was a resounding success. From an IPO of $68, the price of each share increased 223% in the first two months alone, making it one of the most successful IPOs in history.

It’s not too hard to understand what factors were behind ABNB’s rise to the stars and the following are undoubtedly among them.

Strong demand. Investors saw Airbnb’s home-sharing platform as a disruptive force in the travel industry.
Impressive financials. Airbnb reported robust growth and profitability, attracting the attention of institutional investors.
Market timing. The IPO coincided with the pandemic-induced surge in demand for short-term rentals.
Effective marketing. Airbnb’s marketing campaign resonated with consumers and investors alike, creating buzz.

Spotify (SPOT) April 2018

Spotify’s IPO was another notable success that has taken its place in the financial history book. And here too, the reasons are quite easy to recognize.

Loyal user base. Spotify boasts a massive and engaged user base, which gave investors confidence in its future revenue potential.

Innovative technology. Spotify’s streaming platform and personalized music recommendations provided a differentiating factor in the market.

Global expansion. Spotify’s presence in multiple geographies increased its addressable market.

Subscription-based model. Spotify’s recurring revenue from paid subscriptions assured investors of stable cash flows.

Let’s now take a look at examples of stocks that had a lot less luck and success immediately after their IPOs and let’s see what factors have contributed to their failures. Let’s see what we can learn from that.

Blue Apron (APRN) June 2017

From an IPO of $10 per share, Blue Apron’s IPO kept declining to reach the price of just $1 a year and a half later.
Saying that Blue Apron’s stock has “underperformed expectations” is an understatement; the failure was catastrophic and it was due to several reasons:

Overpricing. The IPO pricing was seen as too high, given Blue Apron’s rapid cash burn and competitive market.

Operational challenges. Blue Apron struggled with rising costs and inefficiencies, raising concerns about its long-term profitability.

Weak financials. The company’s financial performance fell short of projections, casting doubt on its growth potential.

Consumer concerns. Consumers questioned the freshness and quality of Blue Apron’s meal kits.

Snap (SNAP) March 2017

Snap’s stock hasn’t performed any better than Blue Apron did. With a valuation of $24 billion at the IPO, Snap immediately started to lose ground to the point of reaching a market cap of just $8 billion only a couple of years later.

Snap’s IPO initially generated excitement and hysteria but hit a “tough-reality wall” not long after. Some of the factors that most contributed to the fall are:

Competition. Although it later managed to find its niche, at the beginning, Snap faced intense competition from Instagram and Facebook, which launched similar features.

Slowing user growth. The company’s user growth decelerated, raising concerns about its ability to sustain revenue growth.

Technical issues. The Snap app experienced technical outages and user complaints, dampening investor confidence.

Key Notes:

Before trading IPOs, pay the due attention to this important factors:

The research on the company, its products and services, and its team.
The market interest and demand for the new stock.
The pricing and evaluation of the IPO against market expectations.
The condition of both the market and the economy.

Key Considerations for IPO Trading Strategies

Do your pre-IPO research

Before trading an IPO, conduct thorough research on the company’s financials, industry trends, market demand, and management team. This will help you to better predict the first post-IPO market response.

Try to assess the interest for that stock

Evaluate the level of anticipation surrounding the IPO. High demand typically leads to a strong opening price and potential upside, while low demand can result in a flat or even declining price, possibly, suggesting a short.
Keep an eye on the pricing.
The offering price is crucial to understanding the potential profit margins. Look for companies with a conservative pricing strategy that leaves room for upside in the aftermarket.

Consider the Market Conditions

Consider the overall market conditions. Strong bull markets tend to benefit IPOs, while volatile or bearish markets can increase the risk of post-IPO declines. Naturally, macro factors such as interest rate and inflation levels must also play a part in your evaluation.

Conclusion

IPO trading can offer traders opportunities and profits when armed with a good strategy. By employing proven strategies such as the first-day pop, long-term hold, breakout, pullback, and sector rotation, traders can increase their chances of success.

Remember to conduct thorough due diligence, manage risk, and align your strategy with your investment goals and risk tolerance.
By implementing these five strategies and looking out for those important IPO aspects, knowledgeable traders can enhance even more their chances of successful IPO trading.

Remember, careful research, risk management, and a disciplined approach are crucial in IPO trading just as well as in any other form of trading.

Once again, I hope this helps.

Stock IPOs and IPO Trading

Posted on April 15, 2024May 13, 2024 by Ophira Top

Initial Public Offering – Introduction

John Tuld, the C.E.O. of a large “unnamed” investment bank in the movie “Margin Call”, says:

“There are three ways to make a living in this business: be first; be smarter; or cheat.
Now, I don’t cheat. And although I like to think we have some pretty smart people in this building, it sure is a hell of a lot easier to just be first”.

Well, we don’t cheat either, and while we hope that all our usual blog articles can help traders be smarter, this one, in particular, is for those who also want to be first. Our next topic is “IPOs and IPO trading”!

Before we can dive into IPO trading strategies and learn the difference between the ones to follow and the ones to avoid, we must first get an idea of what IPOs are, why they happen and how they work. And in this “part 1” of the article, that’s exactly what we’ll do.

Get comfortable.

Key Notes:

In an IPO, a company offers its share to the public for the first time
By having an IPO, a private company becomes a publicly traded firm
On the day of the IPO, the company shares can be traded through a stock exchange.

Initial Public Offerings (IPOs). What are they and how do they work?

Simply put, an IPO is what a privately held company does when it first “goes public”.

To initiate the process, the company offers its shares to the public for the first time and by doing so becomes a publicly traded entity, and its shares are then listed on a stock exchange.

Before diving into how IPOs work and the process behind them, let’s first take a look at why it is important for both the companies having the IPO and the traders and investors looking to profit from it.

From a company point of view…

Several reasons can motivate a private company to have an IPO. The benefits can include:

Raising capital

IPOs allow companies to raise large amounts of capital in a short period. This capital can be used to fund various initiatives, such as expansion, product development, or acquisitions.

Establishing a public market valuation

IPOs create a public market valuation for the company, which can help attract investors and increase the company’s credibility.A higher valuation can make it easier for the company to borrow money or enter into partnerships.

Improving liquidity

IPOs provide a way for existing shareholders to sell their shares, increasing the liquidity of their investment.This can make it easier for investors to enter and exit the company at their convenience.

Gaining recognition and prestige

Going public can significantly raise a company’s profile and increase its visibility. This can lead to increased customer awareness, media coverage, and partnerships.

M&A opportunities

Public companies may find it easier to engage in mergers and acquisitions. Other companies may be more interested in acquiring a publicly traded company due to its established valuation and liquidity.

From a trader/investor point of view…

Traders like IPOs for several reasons and these include:

Potential for high returns

IPO trading can offer the potential for high returns, especially for companies in high-growth industries. When a company goes public, its shares are often priced below their fair market value, providing an opportunity for traders to buy in at a discount.

Volatility

Stock IPOs tend to be more volatile than seasoned stocks, which can provide opportunities for traders to profit from price swings.

Liquidity

IPOs of large, well-known companies typically have high liquidity, making it easy for traders to buy and sell shares.

Short-selling

IPO traders can also profit from IPOs by short-selling the stock if they believe it is overvalued.

Speculation

IPOs can be subject to speculation and irrational exuberance, which can lead to exaggerated price movements. Traders can take advantage of these market inefficiencies when IPO trading.

New investment opportunities

IPOs provide traders with access to new investment opportunities, particularly in emerging industries or companies with innovative products or services.

Momentum trading.

Traders can ride the momentum of an IPO by buying the stock after it has gone public and selling it when the price reaches a certain target.

Technical analysis

Traders may use technical analysis to identify trading opportunities in IPO stocks, such as breakout patterns or support and resistance levels.

Key Notes:

An IPO is a complex process that includes several steps
There are strict regulations and controls a company must adhere to to become publicly traded.
In an IPO, shares are allocated to investors according to their bids.

How does an IPO work?

Having an IPO is not as straightforward as one might think; it is a process that involves several key steps.

IPO key steps

Underwriting

Investment banks act as underwriters, managing the sale of shares and advising the company on the IPO process.

Prospectus Publication

The company files a prospectus with the Securities and Exchange Commission (SEC) or a comparable regulatory authority. This document provides detailed information about the company, its financial performance, and the terms of the IPO.

Investor Roadshow

The company and underwriters embark on a roadshow to meet with potential investors and promote the IPO.

Pricing and Allocation

The underwriters determine the offering price based on demand and other factors. Shares are then allocated to investors based on their bids.

Listing on Exchange

The company’s shares are listed on a stock exchange, making them available for public trading.

What is a pre-IPO then?

Pre-IPOs (Pre- initial public offerings) are private placements of shares in a company that has not yet gone public.

These offerings are typically made to a small number of accredited investors, such as venture capitalists and hedge funds.

Pre-IPOs can be a way for companies to raise capital without having to go through the formal process of an initial public offering (IPO).

Now that we understand and have a clear picture of what IPOs and how they work, we are all ready and prepped to find out in a little more depth what the advantages and disadvantages of IPO trading are, and to finally dive into everyone’s favorite part: IPO strategies!

Hope this helps!

Why are prices rising so much and so fast?

Posted on April 8, 2024 by Ophira Top

Introduction

The US interest rate is still at the highest it’s ever been in the last 20 years, the FED has just begun its third year of quantitative tightening, and, even if slightly, US unemployment levels in the last eight months have been higher than they were in the same period last year.

Given all this, one would have imagined that the stock market – and the financial market in general – would have been the first to the immediate costs of the FED’s victory in its battle against inflation. One would have also expected the price of gold to fall too as the Dollar slowly manages to stabilize its battered buying power. And one would have further speculated that the more risky assets, like crypto such as Bitcoin, would be the last things on investors’ minds of lately.
One could have imagined, expected, and speculated and one would have been wrong. On all three counts, it seems.

During the end of 2021 and the beginning of 2024, stock prices have shot past what many people reasoned probable. The S&P500 rose by over 28% in the six months since October 2021, the Nasdaq by 31%, and the flagship stock of the year, Nvidia (NVDA), gifted its investors an ROI of 90% for the past year. Gold too reached its all-time high of $1731.60 per ounce only a few days ago, on the 21st of March. Bitcoin? Let’s not even go there.

To get an idea of what could happen next, what to expect, and how to prepare ourselves, it might be important to first understand what is pushing market prices higher right now.
With that aim in mind, in this two-part article, we’ll explore ideas and possibilities on what might be behind such an impressive bullish trend, theorize on what could potentially end it or fuel it further, speculate on possible outcomes, and, of course, discuss how to best get ready.

Why are prices rising so much and so fast?

Since none of us has all the answers, in this article, more than others, we are going to have to make use of theories, hypotheses, and a good dose of what-ifs. For now, however, let’s start by a fact: not all prices are rising fast.

Inflation is notably lower than it was last year and, except for the latest little rebound last month, it seems on track to meet the Fed’s 2% target soon.

What is rising – and rising notably fast -, however, is the price of assets across markets. It really does seem like everything is rising to astronomical levels…

…but is it?
We’ll get back to this point soon enough.

Possible causes.

There might be a few possible causes for this all-markets-craze and we’ll view some of them but, beyond that, we can theorize and speculate.

Market expectation of Interest Rates cuts? Could that be the cause?

There is a great sense of confidence in the market expectation that the FED will finally pivot on interest rates this year and Jerome Powell himself has confirmed that he too expects at least three cuts before the year’s end.
Any rate cut would ease corporations’ debt burden, reduce the cost of money, and increase liquidity in the market. These are all positive elements that would make fertile ground for stock market growth.

However, “that ground should not be fertile now”.

The rates haven’t been cut yet and payable interests still stand at their highest level in over 20 years. Then why spend so much on buying assets now when the money to acquire them is bound to cost less in the future (in the form of debt at lower interest)? Just… why?

AI craze, maybe?

At the end of 2022, Opened AI launched Chat GPT which quickly became the fastest-growing consumer app in history with an estimated 100 million monthly users in its first two months of existence. Microsoft, Alphabet, and Meta threw themselves in. Apple and IBM noticed, thought about it for a while, and then followed suit. That was it, the AI craze exploded and grew further and further throughout 2023 and it’s still going now in 2024. Everyone wants a part of it and be part of it at the same time. Even dog food companies are finding ways to stick “AI” somewhere in their name.

People say that during the Gold Rush, it was those who sold the shovels that made the most money. And – by providing its AI-focused specialized software and hardware to virtually all the major players in the sector – Nvidia has undoubtedly become the “shovel seller” of this “AI rush” of ours.

The point is the AI craze has had an extremely contagious effect that has literally moved the markets, once again, with the tech sector in the lead. It is all somehow reminiscent of the “Dot.com bubble” of the 90s and the markets still remember what followed back then.

It could certainly be argued that we find ourselves in yet another stock market bubble and this is what is causing assets’ prices to keep increasing.

Except..
…financial bubbles don’t usually form when interest rates are high and especially not while the FED engages in quantitative tightening and literally “sucks” liquidity out of the system.
Besides, why would the price of gold rise too during a stock market bull run?

Could higher-than-expected earnings reports have caused the highs, then?

Sure they could. But this does not seem to be the case.

As of mid-February this year, 79% of the S&P companies had published their Q4 ‘23 earning report figures. 75% of these have reported figures above estimates, (below the 5-year average of 77%) and, taken as a group, they reported earnings that are 3.9% above estimates (below the 5-year average of 8.5% and also below the 10-year average of 6.7%)

While some have absolutely beaten expectations, the latest earning reports of S&P 500 companies as a whole have been good – very good even – but probably not good enough alone to justify assets at the highest prices ever.

Well, what else could it be? What could have pushed the market barometer so far into extreme greed territory?

If Smart Money is pouring billions of dollars into stocks, gold, and even Bitcoin, it’s because it expects prices to keep rising and we must assume Smart Money is called that for a reason. What is it looking at? What does Smart Money see that may not be so apparent to us?

It might be time to bring some what-ifs into the conversation, I think.

Let’s start with this…:

What if…what looks like extreme greed was in fact extreme fear?

Please, bear with me on this one.

Despite a growing economy and tax revenue, the US Government deficit has increased and keeps increasing year upon year with the national debt reaching the current $34.5 trillion and growing. Furthermore, as we know, since 2022, the interest rate the Government has to pay on that huge pile of debts has also grown higher and higher.

Notoriously, other than attempting to find a solution to the problem, the US government has gotten into the habit of borrowing money (by selling securities such as bonds) to pay for older debts and the interest on them, on top of the money needed for public spending and run the Country. This new debt is then paid in the future by selling more securities and… creating newer fresher debt and newer fresher interests.

However you feel about it, this time, there might be a problem.

More than two years of FED’s quantitative easing have subtracted a huge amount of liquidity out of the financial system, just as they were designed to do. But this also means that there is less liquidity (fewer US Dollars around) that can be spent on things like…
… like buying the government’s debts.

To make matters worse, the expectations of lowering interest rates won’t help make bonds and other Government securities any more attractive to investors. The point is low liquidity may soon become no liquidity.

So…

What if Smart Money was worried that liquidity in the financial system (and the bond market in particular) could dry out completely and the FED could be forced to start printing again?