Wanna see a "Wile. E. Coyote" pattern? Check out LinkedIn (LNKD)
Discussed in this article: LinkedIn ( $LNKD )
I want to look at LinkedIn ( NYSE:LNKD ). LinkedIn ( NYSE:LNKD ) looks like it’s in the Wile E, Coyote pattern, that’s a very well-known pattern that only I know about. Here’s the thing: I was looking at this stock and I remember talking about this, that it kind of looked like it was in what I would call a touch-and-go pattern where you look at the 200-day moving average here, and the stock is just kind of drifting in here, and then it bounces, and then it doesn’t spring higher it just stays in this general area, and then it bounces again. I’ve seen a lot of these patterns where the stock does just that, it’s been in an uptrend, gets overextended, drifts back, gets overextended, drifts back, and then it hits the 200-day moving average, meanders around there for a while, and then takes off and goes on its merry way.
Well that’s really the pattern, and it’s something that takes place and it creates support at a specific level. Here we’ll call it 200.00, it was actually a little bit higher than 200.00, but 200.00 works because it’s an even number and then it’s easy for me to do math. Okay, so now the stocks down below that, look at the volume, it had been trading sideways, in kind of lackluster volume, not great, not bad, just kind of of average; then we get a big down day here, I’m giving a pearls so pay attention to this. We’re looking here, and so far, forget about this stuff, it doesn’t exist yet, so we’ll forget about that, instead I’m looking at this candlestick. So here was support, stock goes up, comes back down, and in one day trades on massive volume.
Look at the volume here, much higher than any other volume here. It opens here, at the top of the little teeny box, trades a little bit higher at some point during the day, I don’t care which, trades all the way down to test this support level, and then closes up near the open. Now I’ll tell you what I would think when I see this test of this level, and it passes, I would be bullish on this stock, I would look to buy the stock because I think okay, big downdraft and a move back up, big massive volume spike, this was a puke, and then now we’re going to get a puke and rally here where the stock’s going to move up because all the weak hands have been flushed out. Well that’s not what happened, in fact the following day the stock traded sideways a little, but not too bad, but enough to give you pause, like enough to have you look at this and say, “Well I know technical analysis, at least the way Fitzpatrick talks about it, isn’t predictive, it’s informative.” By the way, those that say technical analysis is predictive, I predict that you’ll go broke listening to their predictions. Technical analysis is informative; we see what should happen based on our assessment of psychology here, of emotional commitment. We got flushed out of a lot of weak sisters, the stock’s up, it’s been in this touch and go pattern, and now I’m expecting this stock to move higher.
Well, wrong Horshack; it didn’t do that did it? Instead, the stock was weak here, and then let’s say you we’re already buying here, you should really be either scaling back your positions, or zooming way in, getting out your reading glasses, staring at the screen from a really close level to where you get radioactive from all of the EMF’s, and watching this for a break of support. So we got this, and keep in mind now, let’s just say this is a basic day here, that’s the high, that’s the low. The next day we get a higher high and a higher low, that’s kind of cool. The following day, by the way, these are all red boxes, right, all dark boxes meaning the close was lower than the open. So here we get a lower low, a lower high, and a lower low, and a retest of this support level; so the following day, when the stock hits there, if you were in the first place, because this would be aggressive. What I would want to do, I didn’t get in, even though I was looking at it and I’m thinking, this is potentially bullish, I would want o see more; I never saw that, but let’s say you jumped the gun, you got in right here, right here, where ever, you’re down a little bit, not that much, let’s say you bought right at the top at 213.00; now you’re down to 200.03, you’ve lost $10.00 on a $213.00 stock, it’s not even 5 percent.
So you’re looking at this and as soon as the stock crosses this support line you need to ditch this thing, you need to get out of there, because it’s showing you that what should have happened is not what did happen, and so you’re really surprised right? Do you think you’re the only person that’s surprised? No, I think there are a lot of people that are surprised, and this is a stock now that’s in full-on correction mode. By the way, what I mean by Wile E, Coyote pattern is, remember the old roadrunner thing where there’s a cliff here and coyote’s running after the roadrunner, and he gets out a little too far over the cliff and looks down and Boom! And he falls down. So this is a thing where the stock just seems to go over the cliff and then moves down.
Look at the weekly chart; this really gives you a good indication of how things have changed. This is a big change, I will say if the stock happens to move up and test 200.00 I think that’s a good shorting opportunity. Frankly I think, as long as you had some discipline because this has got some downside momentum now, and when downside momentum gets too big, too fast it can be due for a snap-back; but if you’re aggressive I think you can short this thing even right now. But again, just remember as a stock moves lower it gets cheaper, and at some point value guys are going to come in and start pushing this stock up, or shorts are going to cover, but the trend here is clearly low, it’s down, its downward. An aggressive short would be right now, and you just use a trailing stop. Don’t short this stock and let it move up to here, the 50-day moving average, you close your short out because you can’t stand the pain, and then have the stock go down here; it could happen, don’t let that happen to you.
So how ever you’re going to trade it, either aggressively right now, use a tight stop because guess what? You get stopped out, you take a little loss, now you’re waiting for a better shorting opportunity, or for the opportunity to just stand aside and say, “You know what? This stock is not going down any lower so I will just stay away.” What we’re talking about here is risk management, I’m not talking about trading, I’m talking about managing your risk. If you can assess what’s happening with the stock, not predict okay, that’s for the Wizard of Oz and various other folks who find all kinds have meaning in squiggly lines and boxes; I find information in there not meaning. So if you’re with me on the that, that you’re just looking at the information that you have, making an assessment of which group of traders is really in control, is really dominating the action, whether it’s aggressive selling or aggressive buying, and whether that’s changing or not.
If that’s the way you look at the market, and by the way, if it’s not it should be because you’ll make more money and you’ll certainly lose less; then if you can do that then you’ll be able to trade this stock, because your sense is, I think we go lower, I don’t think it’s too late too short because of this weekly chart, this thing looks like it’s got plenty of downside momentum. However, if it does start rallying, now I’m looking at the daily chart, and this is what I’m seeing, I’m seeing these highs, these lows, so I would rather it be more conservative for me too short on a rebound to the top of the channel, because then what I can do, since I’m shorting the stock closer to resistance as opposed to a breakdown of support, I can set a fairly tight buy stop. So you can see how this is actually the more conservative of the two, if you can get it. But if the stock doesn’t pull back, I mean don’t let the thing go to 150.00 without you being short. So you either take this trade, or if you’re taking this right now, frankly, depending on how big your position size is, put a stop there, it’s kind of tough to put a stop up at around 200.00 or so because that’s over a 10 percent loss that you’re going to take.
The whole deal is, you manage risk, the risk of missing out on great profits, so you want to be long or short, versus the risk of losing your assets, which is why you want to always manage your position sizes; maybe you’re not going to hit a 10-bagger but then on the other hand you haven’t risked your entire portfolio on something either.