Accounting irregularities are a bad thing. Clearing them up is a good thing. Here’s how we trad..
Discussed in this article: Diamond Foods Inc. ( $DMND )
I want to look at Diamond Foods ( $DMND Diamond Foods, Inc ). Earlier today, here’s the deal, the company announced third-quarter results that were pretty good, they beat estimates, but they also, and this is the real important part, this is why you see the blue marks up here above the 200-day moving average, they also restated second-quarter earnings.
If you recall, you probably don’t, they had some real squirrelly crap going on back here. They had apparently made some, let’s just say, some shady payments to some of their producers. Ultimately the CEO, and I believe the CFO, had to resign because their accounting was, lets just say not particularly good. Whenever there are accounting irregularities you’ve run for the hills; that’s pretty much the rule, I don’t know if it’s written down anywhere, but you know that’s what you’re supposed to do.
Well look, right now, at least as of the middle of last month, thirty-one percent of the float was short. This had a short interest ratio, in other words the number of days that would have to elapse before all the shorts could cover, if the entire volume on the day was shorts covering, was over twenty-four days. So this is just a powder keg just waiting for a little spark; that’s the way I see it here, this could be a gap and crap; I don’t think it will be because of the shorts, because of how much short interest there is in here, but this stock could gap up tomorrow morning and then fall, or it could gap up and run. What I don’t see it doing is gapping up and pretty much sticking around at this price level; it’s going to do one or the other.
So what I suggest you do is you watch and see how this thing opens up, if it keeps going right from the get go then go ahead and just say, “Okay it’s a short squeeze, I get it, I know what’s happening here.” So you go ahead and buy this stock, feel free to chase it, you keep a stop, again, this is assuming the stock gaps up and continues to run. If it gaps there and it’s just staying there, then don’t do this; but if the gaps and continues to move then you go ahead and buy some stock, but you keep your stop right below that intraday low, that intraperiod low, whatever you want to call it, over the first a five or ten minutes of trading; that way you’re long a stock that all the shorts are scrambling to cover and you’re right in there with them buying this stock. But if the stock falls back into the gap that’s when you’ll say, “Okay, well I guess there weren’t that many folks that needed to cover or maybe there’s just so much supply that it’s time to get out of this stock,” and then you take it for a small loss.
One of the biggest mistakes, probably the biggest mistake that traders make that keep them from becoming old seasoned traders is they don’t know how to take losses; so that you just stick with the trade until it works out. The problem is, for all those folks who used to trade and don’t any longer, it’s because the trade that they were waiting, to work out, well they’re still waiting. Don’t be one of those guys; if this thing falls back into the gap then I want you to go ahead and get out; but as long as it stays above, certainly above the 200-day moving average, then I actually think this is a stock that you can buy, because it’s going to move higher just on the broken backs of all those bears who are going to have to scramble to cover their shorts; also, isn’t this a pretty nice base here? I think so.
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