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For anyone looking to learn about what can make a good swing trade idea, 8Ball has identified one of the original meme stocks with a setup that checks all the boxes.

He likes the setup so much that he decided to make this stock this past week’s “Pick of the Week.”

I’m about to teach you how simple it is to incorporate key fundamental inputs into your screening process.

In addition, I’m going to show you how to use technicals to determine when a stock’s price is ready to move in the direction of its fundamental valuation.

 

The fundamental setup

When we think about some of the “OG” meme stocks, Nokia Corp. (NOK) was among the first to earn this classification.

From a fundamental perspective, 8Ball’s bullish thesis is pinned to NOK’s excess Free Cash Flow.

Teachable Moment:

 

Free cash flow is the surplus cash remaining after a firm has run its basic operations, paid dividends, and spent the cash required to keep up with the competition and to continue growing.

Free cash flow is important because it represents surplus cash that a firm could use to raise dividends, buyback shares, or expand into new business areas.

Quite simply, these are the nuggets that investors look to for signs that a company is increasing shareholder value.

While it is always better for companies to have high levels of free cash flow, it is also possible for a company to have negative free cash flow.

This is usually the case when a company is “burning” too much money.

Companies stuck in this category either must cut expenses or dividends, or they will have to raise cash by selling more shares (which is dilutive) or by borrowing, all of which decrease shareholder value.

A common way to measure a stock’s free cash flow is to calculate something called the free cash flow yield. I’ll walk you through the process of how to screen for this in just a moment.

For example, a company would have a free cash flow yield of 10% if the stock is priced at $200 per share and is generating $20 per share of free cash flow over the past 12 months.

Recent analyst upgrades favor higher prices

On 07/05 NOK was upgraded at BNP Paribas, with a price target of $7.70.

Barron’s also joined the mix recently, stating that there is an inflection in demand for this technology.

How technicals may reveal when it’s time to trade the fundamentals

From pattern breakouts to momentum signals, there are numerous ways technical tools may help traders decide when it’s time to speculate on a relatively large price move.

8Ball’s view coming into this week was that NOK’s setup resembled a “Bullish Swing” pattern.

Let’s break down the reasons why.

As the chart directly below shows, NOK began the week trading above its gap level created between 06/24 and 06/25.

This big-volume gap was formed when Goldman Sachs upgraded the stock to $6.50 (from $4.90), and it developed just days after the stock forged the low-end of a rising channel originating at the 03/15 high and 04/23 low.

Lastly, as recently as this past Thursday, the MACD Histogram witnessed its first positive reading since June 10th.

Figure 1

 

With the MACD indicator signaling a turn back in favor of bullish momentum, a swing trader could then begin to speculate that the stock will soon begin to move up to the high-end of the rising price channel discussed above (currently $6.16).

As always, such a setup is desirable not just because of the timing signal provided by the MACD indicator and the potential target produced by the rising channel, but because of the well-defined stop-out zone created by the combination of the 06/24 to 06/25 gap, rising-channel support, and the 06/23 pivot low (all in the area of $5.15 to $5.30).

Remember, well-trained traders should always enter a trade with a plan.

If you were to enter this particular swing trade, your thesis would be grounded in your belief that the series of higher swing lows (see green circles) of the past several months was about to continue.

Therefore, any downside violation of the $5.15 to $5.30 stop-out zone would signal that your thesis is wrong and it’s time to take a small loss and move on.

How can traders use Finviz as a tool?

Anyone with an internet connection can screen for stocks with high levels of free cash flow, for free.

One way is to use the free version of Finviz.

Below, I’ve provided a screenshot of the simple steps one needs to take in order to find this input.

 

Figure 2

 

From there, all you need to do to create a powerful screen that also incorporates a strong technical component is screen for higher trending stocks.

To do this, look for stocks that are trading above their simple 50- and 200-day moving averages.

Author: Jeff Bishop

 

All traders, both retail and institutional, have overreacted to a rogue headline or a baseless tweet at least once in their careers.

In this new world where information and news, much of which is completely unverified, is thrown at us from every angle possible, it’s often hard not to overreact by exiting a position prematurely or entering a position at a poor price point.

This is why it’s so important to always know where the stock you’re trading stands on multiple timeframes, and not just uber short-term intra-day charts.

Today I’m going to break down how the Fed impacts the markets, and how you can prepare yourself for their next move.

 

The Fed is now looking for higher inflation over the years ahead

 

This past week, the Federal Open Market Committee (FOMC) held one of the eight meetings it holds each year.

The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve System (FRS) that determines the direction of monetary policy by directing open market operations, which is the practice of buying and selling primarily U.S. Treasury securities on the open market in order to regulate the supply of money that is on reserve in U.S. banks.

Essentially, the FOMC’s main purpose is to set monetary policy in order to fulfill the mandates of the Federal Reserve, which include price stability, maximum employment, and stable long-term interest rates.

This past week’s meeting was particularly important because it was the one meeting that is held each quarter which includes a Summary of Economic Projections.

Although the FOMC made no substantive policy changes at Wednesday’s meeting, the Summary of Economic Projections revealed a change in the FOMC’s outlook on inflation.

 

 

Specifically, for the past several months the FOMC’s stance has been that increased inflation resulting from epic levels of monetary stimulus making its way through the economy is only transitory.

However, from this meeting we have learned that the median FOMC policy maker now expects two interest rate hikes by the end of 2023, up from zero in the last meeting.

Perhaps even more significantly, 7 of the 18 committee members expect that rates will be higher at the end of next year, and 13 members look for higher rates at the end of 2023.

In other words, the Fed believes the US economy will more quickly approach its dual mandate of inflation averaging 2% and maximum sustainable employment, which leads to this key point, which is that market participants now respect the possibility that the Fed may move to normalize policy more quickly than before.

 

The Fed is notoriously wrong, so pay closer attention to markets

 

If you’re new to trading, it’s important to understand that the Federal Reserve is notorious for being poor at timing changes in its policy direction.

As it pertains to the latest FOMC meeting, there’s no denying that the change in the Fed’s inflation outlook is important.

Why is it important?

Because it goes against the narrative it had been pushing for several months heading into the meeting, which is that it believed recent inflationary pressures would prove to be “transitory,” and that no meaningful change in policy would be needed to halt the spread in inflation.

While the change in the Fed’s inflation outlook seems to have spooked the market during the 2nd half of this week, since any action taken by the Fed to slow inflation would mean the removal of stimulative measures that help support risk assets like stocks, it is important to understand that important changes in the Fed’s language rarely mark THE turning point in markets.

Instead, it typically begins a process where both institutional and retail investors look for signs that either confirm or negate the Fed’s new language.

 

 

Common signs typically come in the form of economic data, along with movement in key economically sensitive markets like interest rates and commodities.

When it comes to economic data, investors will be looking to see if the numbers, for the most part, come in “hot” over the coming weeks-to-months, as this would support the inflationary outlook.

When it comes to price movement in markets, investors will be looking for any indications that the strong uptrends in interest rates, industrial (base) metals, and agricultural products seen over the past 12 – 14 months have resumed.

As the chart below reveals, these key markets are all in corrective mode right now.

 

 

Lastly, when it comes to stocks, this is where pattern analysis really comes into play.

Specifically, because a process of confirmation must now take place to determine if the Fed will indeed move closer to taking action to thwart inflation somewhere in 2022 or 2023, the market’s opinion of this information will start to reveal itself in some sort of pattern in the S&P 500.

For investors that may be growing anxious about the prospect for increased volatility as a result of this past week’s monetary events, remember these two items:

  • with volatility comes opportunity
  • topping is a process

Right now, with the S&P 500 trading less than 2.0% below its all-time highs (still shy of the very common 3% to 5% correction seen over any decades) and within its rising post-November ‘20 channel, the chart below reveals that there are NO indications that a major topping process has even begun.

 

 

The train keeps rolling…make sure to stay on track.

Author: Jeff Bishop

 

To many new traders, the thought of having to keep track of the numerous variables that can affect the market’s movements can be overwhelming.

Obviously, a major earthquake that strikes a main technology producing city, or a popular CEO of a major S&P 500 company that dies in an accident are variables that are impossible to control.

On the other hand, things like new environmental laws and shifts in monetary policy by the Federal Reserve are variables that smart investors can anticipate and prepare for.

I know a lot of folks talk about the Fed, the role it plays in the financial markets.

But today I want to do a deep dive with you—explain the latest developments from this week’s meeting and how it may impact your portfolio.

 

What is the Federal Open Market Committee (FOMC) and why is it Important?

 

The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve System (FRS) that determines the direction of monetary policy by directing open market operations, which is the practice of buying and selling primarily U.S. Treasury securities on the open market in order to regulate the supply of money that is on reserve in U.S. banks.

Essentially, the FOMC’s main purpose is to set monetary policy in order to fulfill the mandates of the Federal Reserve, which include price stability, maximum employment, and stable long-term interest rates.

 

What in the world is the FOMC “dot plot”?

 

While the committee meets eight times a year, only one meeting each quarter involves a Summary of Economic Projections. One key item on the agenda during these quarterly summaries is the “dot plot,” which is a visual representation of where each member of the FOMC thinks the Federal funds rate should be at the end of each of the next three years ,as well as into the future.

While the “dot plot” is not an official tool of the FOMC, it does provide investors with invaluable insight regarding what various members of the FOMC are thinking.

Here we see the Federal Reserve’s “dot plot” from the most recent FOMC meeting that concluded on June 16th:

 

 

Each dot represents where an individual member of the FOMC thinks the Federal funds rate should be at the end of the year given the current economic information. Of course, it’s all kept anonymous, and no one knows which official is which dot.

What’s the federal funds rate, you ask?

Well, it’s the target interest rate set by the Federal Open Market Committee (FOMC) at which commercial banks borrow and lend their excess reserves to each other overnight.

On the Y-axis is the fed funds rate, and on the X-axis is the year for which officials gave their forecast.

By looking at the chart, you can identify where opinions cluster, which allows investors to get a feel for where the Fed’s bias may lie.

As seen above, 7 of the 18 committee members expect that rates will be higher at the end of next year, and 13 members look for higher rates at the end of 2023.

 

What does this mean for stocks?

 

Make no mistake; any change in the policy language used by the Federal Reserve’s committee members is important.

As you continue to grow and develop as a trader, however, it is important to understand that markets very rarely reverse major trends as the result of one FOMC meeting, or one major news event, or one anomalous economic data report.

To reverse the course of a long-term market trend as strong as the one being created across the major US equity indices post the COVID crisis is akin to steering a battleship into port. In other words, topping is a process.

Therefore, as we look at a benchmark S&P 500 that is still trading right around a rising 50-day moving average as the chart below reveals, there are still no meaningful indications that a major topping process has begun.

 

 

In other words, the trend remains your friend.

 

Author: Jeff Bishop