Identifying proper price levels before entering battle will often make the difference between win..
Discussed in this article: Travelers Cos Inc. ( $TRV )
Travelers ( NYSE:TRV ) announced earnings this morning and they were very good. The stock fell almost four percent and there was some question in the forum today about whether this was a good time to buy it. It was an intraday thing and I had suggested waiting for lower prices, waiting for the stock to stabilize.
That gave me an idea for this video because I want to tell you what I look at on things like this, and hopefully it will help you avoid buying a stock when you shouldn’t be buying it. Let’s say you’re waiting to buy a stock on weakness you’re saying, “Oh my gosh, I hope they blow up so then I can buy the stock.” And they do blow up; you rush in to buy the stock only to find out that you really bought a falling knife.
So let’s see how we can get around this in Travelers ( NYSE:TRV ). I’m going to back up to what this looked like the day before yesterday. So let’s say, “Well okay, I’m looking to buy this stock, I’m not really sure if they’re going to announce good earnings are bad earnings.” Then the market opens up and you see they announced poor earnings. The stock gapped down a little bit, but ultimately it wound up closing much lower, right?
So this is the analysis that you’re going to do before you make a buying decision. First, you’re going to look and see where trading range is. This was the last high, so we would have to assume that this is resistance. Then we would have to look and assume that either this is support, down here, right at this last low, or the 200-day moving average, which is where the stock bounced. So either way you look at it, whether you’re basing it off the bounce of the 200-day moving average, or this specific price level, your support is going to be somewhere around this area in the green box.
So you note that when the stock starts falling. You also know where this logical resistance level is, so you make a decision, it can be a pretty quick one, but it’s also a very obvious one. What risk do I bear by standing aside? Do I risk the stock taking off without me? It gapped down; do I risk it just moving higher? Well it could, but you can see that. You can also know that there’s some resistance here so, it’s likely that even if the stock does start moving higher, you’re going to get some selling in here about 87.00, maybe 87.50, because that’s just how stocks trade.
On the other hand, again, we’re just looking at the daily chart, if you look at the daily chart and the stock gaps down a bit, you can see that you would still have, from yesterday’s close, a long way for this stock to fall before you could expect any support. So again, this is all done on the daily chart, all you’re doing is finding where the logical support is; write the number down 77.50 to 78.50. Write it down because pretty soon we’re going to zoom in here. So that’s your support 77.00 – $78.00. Your resistance is up here, that’s not relevant once the stock starts opening for trading.
So now let’s look at it on an intraday basis. This is how the stock was trading during the first five-minutes of trading, ignore the moving averages, they don’t matter here in a five-minute chart, but the stock gaps down. Now what’s our magic number on the downside? After five-minutes we’re not worried about whether the stock’s going to race up without us, that’s not happening. We’re just wondering where we’re able to buy on the dip, because we want to buy this stock, we’re bullish on this stock long-term. Even though, if you look at the weekly chart, you’ll actually see that the stock is in consolidation but that’s for another time.
The bottom line is, you’re looking and saying, “Okay, well gosh, maybe this bottom here, Wow! This is a great buy point, if the stock gets down to that level again I’ll buy it.” Don’t do it. What was our level? The level was 77.50 to 78.50. What happens is you wind up getting lost; you wind up getting lost in the intraday mess. You look at this chart, you don’t look at the numbers here on the left, and because of that you wind up losing your frame of reference, you wind up forgetting about the fact that the stock can likely go clear down here before finding support.
No, you’re just looking at this and then we move forward, the stock goes down further, so that didn’t work out; you’re sorry you bought, or maybe you’re waiting for the first green bar, which is the next one here. You say, “All right, now the stock has found a bottom, now I want to buy this stock on weakness right?” Well once again, what’s our magic number here? We’ve got 83.40 on the downside 83.80 on the upside, that’s our little trading box here. Well, what was our magic level? It was 77.50 to 78.50, so that’s not working.
The stock continues to move, and by the way, why do you think the stock is falling at this point? No, there aren’t more sellers than buyers, there’s always the same number of shares sold as there are bought. The aggressiveness of sellers continues,nobody else is buying on the dip right here; everybody’s backing away.
So when you see a stock fall 5, 10 minutes, and then 15 minutes into the market, it rallies just a little bit, and then starts to move lower again, you know that stock is trading in an air pocket and its going to fall further, you want to back away. You’re doing an intraday trade here, even though you’re just trying to pick up the stock for a long-term hold. So then you get the consolidation, by now you’re in the dead zone here in the middle of the day, nobody really trades much, there’s not going to be whole lot of move in this stock, and then the stock does what it does for the rest of the day. The idea is, that even as we go into the close, the stock is still where, $82.00? What is our magic level? It’s 77.50 – 78.50.
Now to the daily chart, we’ll take another look. Okay, so you didn’t buy the stock on the way down, now we’re looking at the stock, 82.21, are we going to buy Travelers ( NYSE:TRV ) now? Well, I will still say that I need to see this level tested. Perhaps it won’t come all the way back down to it, maybe it’ll come down a bit and then start bouncing, but this is still way too much room for the stock to move to the downside before finding any kind of natural support.
With that said, a stock like this that moves down almost four percent in a day is likely going to get some kind of rebound, if not tomorrow definitely the next day; they don’t just move lower and lower and lower. But if so, just keep something in mind, all these folks that did buy this stock on the way down, wish they hadn’t, you’re likely going to get some resistance on any kind of rally.
So I would steer clear of Travelers ( NYSE:TRV ), let the stock settle in before you look to buy some. Also, you look at the weekly chart, again, is there really any risk that the stock is going to run away from you, do you really have to buy right here, right now? Ask yourself that every time you push the button, is there a particular reason why I’ve got to buy this stock right here, right now? If you can’t think of a reason then maybe you really need to rethink whether you’re buying it.