Traders: The Best Way to Seize Opportunity? Slow Your OWN Momentum Down!
Energy Transfer's (NYSE: ET) rally to 2-year highs was NOT about instant gratification. It was about waiting patiently for prices to say "fire!"
by Nico Isaac
Updated: May 06, 2022
Okay, so I'm about to date myself here but I remember the "olden" days before streaming, when you had to wait an entire week for the next episode of your favoriite TV show.
My friends and I would conjure guesses as to how the plot would play out and then, 7 breath-baited days later, we'd sit at our respective TVs at the designated airtime and finally find out if we were right.
That wait, as challenging as it was, made the outcome exponentially more satisfying.
But let's face it. Those days of serial TV have gone the way of dial-up. We now live in an era of instant gratification. In one child-free weekend you can binge-watch an entire series from start to finish while having your food almost instantly delivered to your door with the press of a phone app.
This desire for instant gratification is nothing new, however, to the filed of mainstream finance. Traders have wanted to know yesterday where the markets they follow will be tomorrow since the time of Tulip Bulbs
Take, for instance, the "archaic" strategy (like, even older than me!) known as "momentum investing." On Apirl 22, Yahoo Finance summarized how this model works and then applied it to a Big Board listee and natural gas tycoon, Energy Transfer LP (NYSE: ET). From the Yahoo Finance article:
"Are You Looking for a Top Momentum Pick? Why Energy Transfer LP (ET) is a Great Choice.
"With this methodology, taking advantage of trends in a stock's price is key; once a stock establishes a course, it is more than likely to continue moving that way. The goal is once a stock heads down a fixed path, it will lead to timely and profitable trades.
"That is why looking at longer term price metrics -- such as performance over the past three months or year -- can be useful as well. Shares of Energy Transfer LP have increased 21.35% over the past quarter, and have gained 44.54% in the last year. In comparison, the S&P 500 has only moved 0.36% and 6.78%, respectively.
"Given these factors, it shouldn't be surprising that ET is a #1 (Strong Buy) stock and boasts a Momentum Score of B."
Translation: "What's been going up will stay up; and what's been falling will stay down." In a nutshell.
But if you look at the recent history of Energy Transfer stock, this logic didn't pan out. At the end of 2021, ET had endured not three, but six straight months of decline for a 31% selloff into its December 30 low. To use "momentum investing" meant projecting ET's existing "fixed path" -- i.e. down -- into the future.
Yet, from its December 30 low, ET started to rally in a powerful SURGE to 2-year highs on April 20.
And that's the problem: If all you use is past performance, you will inevitably miss the turns. Market momentum, after all, eventually runs out of steam, in either direction. And then comes a change in trend.
To wait for those moments -- those magical moments of catching a market reversal early but assuredly -- requires tremendous patience. Our Trader's Classroom editor Jeffrey Kennedy understands that well. And, on January 4, as Energy Transfer LP was just starting its bull run, Jeffrey explained why delayed gratification is key to confirming market trends:
"We're sketching out what I refer to as an Elliott wave road map for higher prices."
"So, what do we do now. Do we just immediately place a trade? No, we wait. We wait for confirming price action. We wait to say, 'hey, does this analysis actually warrant taking a trade?' We do our risk/reward ratios here... We begin to look at other factors. I'm not going to be in a hurry.
"That's why I say ready, aim, aim, aim and then fire.
"When I first started trading years ago, I usually had that process bass ackwards. I was ready, fire, aim. I would see something, get excited, take the trade, and then once the trade was on, I would start taking a look at my indicators and ocillators basically looking for information which supported the position I had just taken.
"I was putting the cart before the horse. What I've learned to do over the years is I always know that there's plenty of time to place a trade. I'm never going to be in a rush to execute anything."
And, in the days that followed, Jeffrey's patience was justified. ET's price action confirmed his bullish analysis as shown on the updated chart below:
On May 2, Seeking Alpha posted his headline: "Energy Transfer Flexes Its Financial Muscles."
In truth, Energy Transfer stock has been flexing its muscles for the past 4 months. Whether it will continue to do so is not about the past.
So, traders, you have a choice. Go for the strategy that claims to predict long-term trends based on a "wing" and a prayer of the past performance.
OR -- utilize the objective technical market indicators, like Elliott wave analysis, which asks of you one thing: Be patient and wait for prices to confirm your wave count.If you're ready to choose option 2, find out which stocks are on Jeffrey's Trader's Classroom watchlist today.
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