Our SanDisk (SNDK) short is working well. Here’s the next move.
Discussed in this article: SanDisk Corporation ( $SNDK )
Last night I talked about SanDisk ( $SNDK SanDisk Corporation ) as being a pretty good shorting opportunity because the stock was printing a lower high; falling beneath the 50-day moving average and rallied up to it, just barely above it, and then came back below it on heavier than average volume. So that’s an indication that this is just, I’m pretty sure I mentioned it last night, like a dead cat bounce. Now we get a lower move today, down almost two and a half percent.
As I look at this, in fact we can even switch this to like a two-day chart here, looks the same, we’ll go to a three-day chart. Okay, this really gives you a sense of what’s happening here, big down move, little bounce, and then finally a bigger move down. So this is a stock that I think you want to stay short. However, that’s more of a long-term view. You look at the weekly chart, you can see we definitely have more downside here, I’d say $48.00 maybe even $47.00 to the downside, but that’s not just going to go in a straight line. I got this rule of thumb called the “Three-day Rule of Thumb,” and I talk about this fairly often in the membership section of Stock Market Mentor.
The real, quotes, smart guys, and by the way this isn’t really my rule, I just kind of stole it from Buzzy Schwartz who wrote a book called “Pit Bull,” which is a really, really good book, I read it years ago. His thesis, or his approach to these kind of sell-offs, and these kind of advances is, when you get these wide-ranging days on heavier than average volume, like we’ve got over the last couple days, the way he looks at it is, the real smart money, that’s the highly capitalized traders or fund managers or whatever; they sell on the first day.
The semi smart guys sell on the second day that would have been us at the open this morning, we’re not the real smart guys we’re the semi smart guys. On the third day the not so smart guys, which tends to be those folks with the least amount of money, no pejorative comment there, it’s just that when you’re starting out you don’t have a whole lot of money nor do you have a whole lot of knowledge.
So the idea is, if you’re selling, in this case, on a downdraft, if you’re selling on the third day you’re pretty late to the party, and that tends to be the day that as the selling gets exhausted, then what happens? Traders that saw this decline are waiting, they’re waiting, they’re waiting, the stock is back at support, we could expect to see some kind of a bounce tomorrow; that’s not a prediction, but it does just fall into this method of analysis to where two big down days are typically not followed by a third one.
Look at the price action on this chart, one down day, two down days, followed by an up day, then another down day, then another down day, followed by not an up day, but at least not a continuation of the downtrend. You see a similar thing back here, a big down day followed by another down day, if you were selling on the third day that’s not going to work too well. Anyway this is an idea that I think you’ve got to keep in mind as you’re dealing with the volatility in the market; and we do have a pretty volatile market right now because the S&P is up at the top of the range and there’s a lot of pushing and pulling going on as this selling may go away, or is this just going to ultimately be another buying opportunity just like the last umpteen pullbacks that we’ve had?
With this type of volatility you want to be basically paying really, really close attention to this three-day rule. Because, what happens is, if you’re long this stock, think about it, you’re long the stock then of course you want it to go up. It goes down the first day here and you’re not happy about it, you’re going like, “Oh my gosh, I’m not happy.” Then it comes down a second straight day and now you really bummed out, because you see this big move and you can’t take the pain anymore and so tomorrow morning you say, “That’s it, I got to close this out.” Well, so you’re at the lowest common denominator, you’re closing out this long just as the shorts are starting to cover, they’re starting to buy the stock back, they’re buying it from you, that drives the price up and then ultimately the stock’s going to do what it’s going to do.
What I’d suggest is, that frankly if you missed the short today, you missed the short this morning, and you’re wondering if it’s too late to short; I would say yeah, it is too late to short. Watch and see how the stock bounces, perhaps it doesn’t bounce at all but if it does bounce watch and see how it behaves as it approaches today’s intraday high of $52.50, $52.49. So let this thing come up a little bit and then if it starts to roll over you can, you know, start a new short.
Now for those of you that did already short, you want to just keep in mind that there is more downside, I don’t want you to necessarily get jiggled out on any kind of bounce. You’ve got a pretty good entry, if you’re happy with a two point four percent return in a day, because you could have shorted it on yesterdays close, if you’re happy with that, then go ahead and take those profits, but as I look at the S&P, and as the S&P goes so goes about five hundred stocks, as I look at the S&P we could get a bit more weakness. Anyway, I hope that helps.