How to Present a Trade Idea: Coronavirus Edition

The article below is a generic template for pitching a trade idea on the internet so you too can be an expert on trading the ongoing impact of the coronavirus. The key to success is publishing a lot of these throughout the year. I mean a whole lot of them that covers every conceivable sector, both long and short. At the end of the year, go back and delete the ones that didn’t work out and pretend like you never wrote them. Repeat every year.

With the coronavirus carnage it goes like this:

If you want to skip the entertainment below and get straight to the punchline: [ETF] has shown weakness over the past 2 months but has consolidated and found support due to the firing of the Fed Bazooka and the CARE Act. Since it looks like the drop has stabilized I’m going to jump in and try to ride it back higher.

However, if you want to read on for what too often passes for trade analysis, feel free to keep going…

Obligatory Macro Environment Analysis

Coronavirus definitely caused the pullback. And if it was showing weakness even further back then it was probably either the residual effects of the trade war or maybe interest rate hikes. Of course, maybe you just had a bunch of people decide to take profits, which lead to a cascade of sell orders from algorithms and monkeys. Honestly who knows but we just experienced a risk-off period that created a buying opportunity for us.

Chart Analysis of Questionable Value

I drew a bunch of random lines on the chart to pretend like they show support and resistance levels. News flash: they don’t. But the chart below clearly shows the classic technical pattern called the Carny Rollercoaster. The Carny Rollercoaster is a chart pattern that seems like fun when you first get on but ends in a tragedy that no one on the ride ever recovers from.

Some amateurs would consider the below technical pattern to be the Satan’s Snowball setting up, but they would be wrong. Satan’s Snowball results from events happening in the market that shouldn’t exist and takes you completely unawares when it smacks you up against the side of your head. If you’re not careful, all of your capital melts away when you get to the bottom.

2020.03 SPY

[Note: make up your own chart patterns like Satan’s Snowball. Use a random word generator or approach it like staring at a cloud. During football season you could use a bunch of Xs and Os and sketch in your favorite football play.].

Since the randomly drawn lines above are not predictive we always use the pioneering work done by the Franciscan friar William of Ockham (of Occam’s Razor fame) to double check our assumption. It’s a 4 step process:

  1. Pour yourself a shot of your favorite liquor.
  2. Take the shot.
  3. Now squint at the chart for no more than 2 seconds. A real technical analysis pro will use his peripheral vision while squinting.
  4. Answer one question: did the blurry, squiggly line you thought you saw go from the bottom left of the chart to the top right?

If you answered “yes” to the fourth step above then you’re in luck! The trade has been confirmed. If you’re somehow not sure, then repeat steps 1 through 4 above until you have your answer.

Obligatory comment on what’s driving sector support in light of the damage caused by the coronavirus

Is there a narrative that market participants may support to keep the continuation higher going? Demographic trends are often cited. Feel free to throw around terms like Millennials, Baby Boomers, and urban cowboys.

Then toss in the punchline: “Based on the above, I think entry at the current level represents a favorable risk to reward scenario.”

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