Trading Twitter (TWTR)? You probably know a lot of the wrong stuff to know. Here is all you nee..

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Discussed in this article: Twitter Inc ( $TWTR )


I want to go over Twitter ( NYSE:TWTR ) today. This stock has pretty much been on fire; I’ve been reading some, I’ve been watching the financial news networks, actually more than I should, more than I usually do, and I just want to help you out on Twitter ( NYSE:TWTR ). This stock is up 45 percent this month, that’s a pretty big run. It’s also though, an IPO. Almost by definition an IPO that’s released wherever it’s released, it’s priced wherever it’s priced, and then ultimately breaks up through that. Almost by definition that IPO is expensive, it’s like too expensive, it’s like not a good value, it needs to be sold, it needs to be shorted, because companies try to get the maximum price they can for their stock.

If you remember Twitter ( NYSE:TWTR ) was, because of the way their company was structured, they didn’t have to quite give out as much information as other publicly traded companies, “And while we’re, actually we’re really not making money,” and I’m sure there are a lot of fake accounts and stuff like that, so there was a lot of stuff that was really not disclosed, or at least not disclosed early enough to be disseminated through the public. Now, all the institutions knew, all the fat guys on Wall Street at the institutional trading desks they got all this, and they were happy to dump the shares to whoever wanted them and as I recall the stock was oversubscribed.

So here’s the thing, the stock comes down and everybody’s going, “Oh, is it going to be another Facebook ( NASDAQ:FB )?” And it kind of was, if you bought right at the top, it’s around $50.00 I think is the intraday high, and then you rode it down to we’ll say 40.00, wherever it ultimately bottomed out, a little bit below 40.00, that’s a 20 percent dip. Now I know a lot of retail traders sadly, that will hold a stock through 20 percent dip and then wonder if they should buy more. Well losers average losers, winners will never do that. But the point here is, this stock traded down and then right here, the stock started perking up. I was short the stock back here, I forget exactly when, I generally don’t remember my losing trades.

I remember the one losing trade I made back in 2000 after the bubble, actually during when the bubble popped I was short a bunch of out-of-the-money puts, I couldn’t believe it, I was making like $1500.00 per contract and I was short a boatload of contracts, the implied volatility was so high. It was absolutely amazing I couldn’t believe my brilliance. Then the market turned and about half of my account was wiped out in one trade because I couldn’t pull the trigger, I froze and I never averaged down, I didn’t have any money to average down. Listen to me, because I don’t want this to be you, and if it was you then go forth and sin no more. But I couldn’t take my loss so I would sit there and wait for the stock to be coming back up and then I would take a lighter loss and of course that never happened. I believe the stock was Emulex ( NYSE:ELX ), I’m not sure but I do remember the trade itself, I remember just what the chart looked like, it looked like a falling running chainsaw with flames coming out at the back of it.

So the point is here, to get back on track, when a stock falls like this, and you’ve got some smart guys, and I would never count myself as one of those, I just look at numbers and do more kind of quantitative analysis on price action, not on fundamentals, not my deal, but when I see a stock that looks like it’s fallen lower I will be short that stock. Well I guarantee you that I covered my short somewhere around here, maybe even when the stock started breaking out, but anybody who knows me, if you’ve been with Stock Market Mentor for any time at all, you know that this is not my trade, to short, if I’m a stock and it starts moving against me, because I’m generally bullish, and by the way the reason I’m generally bullish is, because I look for bullish charts, I don’t look at any stupid stock and see it going down and think it’s a great value, let’s go buy that one because you’re going to make a gang of money.

No, because I like stocks that trade up, because I get it, most retail traders will only buy stocks, they don’t sell them unless they’re closing positions; most money managers would never short a stock, and the markets just generally, not the market, but a lot of stocks generally move higher because the underlying businesses really are trying to do better, so you find the stuff that’s working and then you get on board that. The stuff that’s not working, maybe you thought this wouldn’t be, okay you can go ahead and short that, but just know this, all the value guys that were dogging on this stock as being grossly overvalued, and by the way I think at $59.00 it totally is grossly overvalued, and with that can you imagine how grossly overvalued the stock’s going to be at 65.00, OMG, it’ll be a at nightmare.

So the point as all these folks who say Twitter ( NYSE:TWTR ) is grossly overvalued, they’re not predicting it’s going down to zero, they are saying it would be fairly valued if it was I don’t know 35.00, 30.00, 25.00, whatever, they all have their price targets down here and so to be shorting a stock as it’s moving lower, that’s fine because stocks in motion instead tend to stay in motion until acted upon by an opposite force. Well the opposite force would be when these price targets from valuation get hit. All of a sudden, I’m giving your pearls here, all of a sudden there’s buying pressure. All of the selling pressure, all the activities of sellers that pushed the stock down because they were exchanging the stock for cash, they were happy to take less cash because they just wanted out of this pig, those traders are done, they’ve pushed the stock back. If they want to get back into Twitter ( NYSE:TWTR ) they’re not going to get back into it and short it, they’re going to be down here lurking somewhere, waiting to buy it. So what I’m saying is, as the stock moves lower the probabilities of it reversing increase, but we just don’t know exactly where that’s going to be, but you know there’s definitely a demand for it, it’s just a latent demand down here someplace.

Now, on the other side, what about the upside? You could say, “Well yeah, but somewhere up there, you know there’s latent supply and everybody’s going to be selling.” Okay great, what price is that? Like do people have a price target of $60.00, will I think the stocks fairly valued? Or I think, “Oh my gosh, Twitter ( NYSE:TWTR ), you know it’s moving here, I’ll tell you one thing, I love this company fundamentally, but if it gets to 65.00 that’s when I think you should sell.” Okay, all these folks who’ve got these big price targets, they can’t really base them on fundamentals, they’re doing a Qualcomm ( NASDAQ:QCOM ) to 1,000 price target, they’re just out there. What’s really pushing this stock up is just buying pressure is outweighing selling pressure, that’s it; we’ve got more aggressive buyers than sellers. Why try to make sense out of it. One thing that I’ve seen a lot of, I’ve seen some folks on your favorite financial network, they’ve generally been wrong about Twitter ( NYSE:TWTR ), generally been wrong, talking about how; Well you know the stock is like grossly overvalued and the reason the stocks moving up in large part, there’s quote “No question that there’s a short squeeze going on.”

Okay, I disagree with that, there is not a short squeeze going on, it’s fine to say, “Oh my gosh you know there’s a short squeeze going on.” Think about this, you could look it up on Yahoo ( NASDAQ:YHOO ) and maybe a lot’s changed over the last ten days of trading or however long it’s been. But has the end of last month, when by the way the stock was actually looking like it was a good stock to be shorting, at the end of November there were 17 million shares short; Oh my gosh, 17 million shares short, that’s monstrous. Well, not when the stock averages 20 million shares a day of trading. So they’re 17 million shares short, depending on when you look at average volume over the last 10 days, it’s averaged 20 million over the last three months, it’s average 17 million, and on Friday it traded 39 million. So how many shares are short? Seventeen million, what’s the short ratio as of the end to this last month, one, one-point-one, short as a percentage of float, 5 percent.

So the bottom line is, I’m sure there’s shorts scrambling, and I’m sure that some of those folks who are scrambling are probably known by some of to folks that you hear, that you read, you know writing about it, talking about it, and stuff like that. And by the way, I’m not denigrating any of those people, what I’m trying to do is give you some real information as opposed to real interesting information. The bottom line is, they probably know a lot of fund managers who are short this stock and now they’re scrambling because they don’t want to lose their assets on this stock. But this is not a function of short-covering, it’s not a function of being undervalued, and listen to me because if you’re this far into the video here’s your payoff, it’s moving higher, because it’s moving higher end of story, there I just gave you my secret sauce. I’m exaggerating but really not that much, not on stuff like this. This stock has printed higher intraday highs every time here. This last time it printed a lower intraday high, but it also printed a higher intraday low, so you’ve got to look at this is kind of day of indecision. By the way this was a lower intraday low than this one, but this was a higher intraday high.

Okay, so the point is, this is a beautiful chart, it’s a beautiful chart, don’t try to pick the top, but just know this, let’s say you do this, and this is one way you can trade this stock; we saw this lower intraday low, now if you’d sold there you’d have been shaking out and you would have missed a six-point move in the stock. Okay, but let’s say this is your trading tactic, you see these higher lows, the first thing you do, turn off the TV, second thing you do, start watching the chart, set some automatic price alerts. The one alert you want to have right now is 55.45 that is Friday’s intraday low. If the stock is at 55.45 then you know that this is making a lower intraday low; now, not necessarily a problem, but definitely noteworthy. So you see what the stock is doing, by the way, another alert you want to set is 59.41, that’ll probably be hit sometime Monday morning; then you know the stocks at least making a higher intraday high that covers you’re bullish thesis that buyers are increasingly aggressive. How do we know that, because they keep paying higher and higher prices for this stock during the day.

Okay, next you look at the hourly chart; we see a lot a sideways trickles, we saw it here, we see it here, we see it here, now we saw a tiny one here, and now we’re moving higher again. That’s on an hourly chart, let’s go to the 15-minute chart. Now what do we see? We see a big move first thing in the morning, kind of a sideways drift, big move first thing in the morning, sideways drift, big move first thing in the morning, sideways drift down a little bit, but still. Okay this day, on the twelfth, on Thursday the 12th, I forget frankly, what news we were looking for, but finally the stock took off, there’s the big move. This was actually kind of a break in the pattern because the stock drifted sideways on the twelfth right? Okay, so let’s look and see what the twelfth was, interesting, that was the lower intraday low. So we go back to the 15-minute chart, you see that lower intraday low was hit at 10:30 then the stock started drifting higher. So you could have been stopped out, on a stock like this, never get stopped out of your entire position, just don’t. So let’s say you got stopped out of your entire position there because you were really, really scared about this stock. At least you had a partial position higher, okay.

Now, let’s get to present day, so Friday the stock drifts around, first thing in the morning it goes up, closed here 55.33, by ten o’clock the stock was up at almost $58.00. So it had a nice little run and then towards the end of the day it rallied. That’s not really often the case, when you see higher volume, a big rally into the close of a Friday on a month that’s notoriously illiquid, i.e. December, the month of Christmas, oops, the month holidays, for those of you that insist on that. So what I’m saying is this, let’s go back to the daily chart; okay you can stay long this stock, if this turns out to be the top, $59.00, the only way that you can stay long this stock is to say, “Okay, I’m long this stock, if this turns out to be the top I’m not going to have sold at the high.” Let’s say you set your stop below 55.45, let’s say you set it, because you’ve got to put it somewhere, let’s say you put it at 55.00, never put it right on the even number, but still; okay, you’re losing $4.00 on a $60.00 stock, what’s that, 6.5 percent, something like that, that’s what you’re risking. You would risk that on part of your position, so if you get stopped out you get stopped out.

By the way, then if this stock keeps going down, well crap, you sell more of it. And then you wind up, I don’t know wherever you wind up taking your profit, it’s all somewhere down here, and you’re going to look back and say, “We’ll shoot man, I could have just sold at all at $59.00.” That’s fine, but what if the stock continues to go up like this, to 70.00, and you sold it all at $59.00? See, it doesn’t work, so the key to holding this stuff is, number one don’t listen to what anybody says, and that includes me, I’m telling you don’t listen to me, watch the chart. Here’s how you can watch the chart; I make no predictions on this thing, I’m pretty long Twitter ( NYSE:TWTR ), this kind of freaked me out a little bit this day, but I’m pretty long Twitter ( NYSE:TWTR ) because I think it’s just going to keep going up. The only price target I have is the price target that Twitter ( NYSE:TWTR ) prints when it decides that that’s enough, and then this little thing is only going to tell me after the fact.

So the point is, when you get an opportunity like this, you pounce on an opportunity like this, you stick with it you don’t let other people shake you out because they sound smarter than and you. They may be smarter than you but I’ll tell you one thing, frankly it doesn’t take even average intelligence to be a successful trader. Now, I think most successful traders are of above average intelligence, but the reason is because it attracts those people, because this is not really that easy, but it doesn’t have to be that hard. The point is, the smartest guy in any trading room is this guy, the smartest guy is the ticker, the smartest guy is the chart, is the way the price moves; anything beyond that is just hubris and blubbering and how long until the next commercial because we’ve got to fill this in.

And by the way, I’ll say it again because it’s really important, it’s really, really important that you understand this, it’s important to me, I’m not dogging on financial television, or on all the free stuff that you can get on the Internet, I am not putting that down, I’m not criticizing it at all, because I’m one of the guys on there sometimes, so you’ve got to listen to what those guys say, and they’re pretty smart, they get it they understand their stuff, they’re quite knowledgeable, but nobody can predict what happens here, nobody. Anybody who you hear predicting something on CNBC, run, run, because there is no prediction, there’s observation and there’s riding along with the trend. If you hear somebody predicting first laugh, or text your friends ROFLMAO, and those of you know what that means, nobody can predict, they can but it’s a crapshoot, it’s a coin toss. But if you just follow trends like this, know that they’re going to continue until they don’t. It’s like ride her till she bucks you off, or you don’t ride at all, but don’t wait for eight seconds, if you can still stay on after that then just keep going.

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