STP Algo Trader - Market Insights

The stock market has continued to grind higher, and now, the major indices have achieved new all-time highs.

Considering where we were in April, this is an impressive accomplishment.

The ability of the stock market to come back from the abyss and be at new highs just two months later speaks to the underlying strength of the environment for stocks.

This isn’t just an opinion.

There is a ton of historical data that supports the idea that it bodes very positively for stocks in the following year.

Below is an example from a great X/Twitter account called Subu Trade- they are worth a follow!

Here it is…

The post points out that we have just seen the stock market rally from a -18% drawdown to a new one-year high within three months. This has only happened eight times (including 2025) since 1927!

The majority of the time, when this has happened previously, the stock market has taken a break over the next month.

As you go out further, though, it bodes very well for the future. The stock market was higher 100% of the time, three months and one year later. It was also up all but once six months and nine months later.

This is just one data set, but there are dozens and dozens of these out there.

Many are about the rally's strength, but others are about the breadth and other signs of strength.

Everything indicates a high probability that stock prices will rise over the next year.

At the same time, though, many stocks are extremely overbought.

Take a look at this chart of our favorite stock – Talen Energy Corporation (TLN)…

First, this has been an AMAZING stock! We first recommended it to readers of HX Research with the stock at $67 back in February 2024, and it is about to hit $300 per share.

Second, this is a beautiful chart. This is the definition of strength. The stock has repeatedly tested the moving averages and then rallied from them.

Finally, this company is also a perfect example of what we seek at Signal Trader Pro – a "winning" stock combined with significant operational momentum. The stock is not in our universe because we don't yet have twelve quarters of data, but it would rank as a BULLSEYE stock if we had enough data.

So, the above conversation sets up an interesting juxtaposition – what do you do with a positive intermediate-term outlook on the stock market and an awesome “winning” stock/company but in a VERY overbought situation?

The answer is to trade INCREMENTALLY.

We think the market and TLN will be higher in six and twelve months. Despite that confidence, we also believe that the NEXT move in both will likely be down and volatile.

Given the strength in both, it could also be fairly large. The 50-day moving average for TLN is down at $250 or almost -20% from current levels.

Our advice would be to take stocks you love and – if you don't own them already – buy one-third of what you eventually would like to own.

Then, be prepared to buy the next one-third around the 50-day moving average on a pullback. Finally, keep the final one-third for if we enter an extended sell-off.

You make money on a great idea if the stock keeps increasing, albeit only one-third of what you would have made if you had bought the whole position. However, you still capitalized on your insight while respecting the technicals.

If it pulls back, you are ready and can turn a loss into an opportunity.

This strategy allows you to take advantage of stock and market strength while managing your risk. It also positions you to take advantage of the panic of other investors when the market invariably consolidates or corrects.

Having a trading plan will allow you to participate in the BULL MARKET while still being prepared for the worst.