Do you see this pennant on Salesforce (CRM)?
Discussed in this article: Salesforce.com Inc. ( $CRM )
I want to look at Salesforce ( NYSE:CRM ), here’s why. This is not today’s chart; this was from a while ago. The company announced earnings that really, really surprised the Street. You can see how far the stock gapped up, and let’s say you see this stock, Wow! It moved up above this prior resistance, I want to buy this stock.
So you say, “I’m going to buy the stock at $50.00.” Okay, where you going to put your stop? Well, you can put it down there, but that’s pretty silly, isn’t it? You’re basically putting a 20 percent stop on your position; or you could put it here and say, “Okay, well if the stock pulls back to below these prior resistance levels here then I’m going to get stopped out and I was wrong to buy this thing.” Or you can look at this and say, “Wow! You know maybe I better watch it a bit because if a stock’s gone from 42.00 up to 50.00 in a couple days, I wonder how much farther the stock can move before it pulls back? So maybe I’ll just hang out and watch the stock for a bit.”
So what happens? The stock goes up a little more, and then its down, and you can see what’s happened. We’ve got the stock pulling back, it didn’t really continue, instead it pulled back into this little flag pattern. So if you’d bought here, you’re holding this stock for how many days, feeling like you’re at risk, because the stock could very well pullback. You see other stocks working, and let’s face it, if you bought this stock here, you’re kind of an aggressive trader, you like to be where the action is, you’ll buy high, with the understanding and expectation that you’re going to sell even higher, you like to kind of have your hair on fire a little bit, you love the drama, that’s why you’re going to buy a stock that’s broken out like this.
Even though it’s way up here you’re still going to buy it. That’s fine, I wouldn’t say I’m in that category now, but I certainly used to be. A lot of those guys make good money doing just that, running around with your hair on fire. Or, you could sit here, wait for confirmation that this move is actually real, that the stock’s going higher. What you do is, you’re not in this stock when it is forming this pennant pattern, instead you’re waiting for the breakout; that’s what you’re getting now. Now, you also have a good place to put your stop.
So you’re buying this stock right now and you’re actually putting in a pretty tight stop, like right here, because if this pattern is a good pattern, move up here, tight consolidation, and then a break out to the upside, then this stop should not get hit. You don’t have to put it lower, because you see what’s happening here and you say, “If the stock falls back into the pennant then I’m wrong.” So you get out, you don’t have to wait for more of a pull back. You’ve got to always define your risk, always define what you think your potential reward is before you make the trade.