Are you getting drilled by McDermott (MDR)? Here’s how you dig yourself out of that hole.
Discussed in this article: McDermott International Inc. ( $MDR )
I want to look at McDermott ( NYSE:MDR ) here because I’m going to give you a trade. I haven’t been watching this stock for a while because it just hasn’t been doing much. But as you know I have been noting this turnaround here; nice moving average crossover, by the way, a lot of people wrongly trade on these crossovers like, “Oh well, the 50 is crossing over the 200-day moving average so it must be time to buy.” Well, that didn’t work out too well for you. I see this a lot, a lot of times the bullish crossovers mark the top, and the bearish crossovers tend to mark the bottom. The point is, this stock looked like it was doing well, it was trickling along the 50-day moving average and then what happened, the company announces earnings and they get crushed.
My suggestion is, this is just an observation that I want to make, don’t enter a stock unless you know what your exit is. You’ve got to know what your downside exit is, you need to know exactly why you’re in a stock, you also need to know whether it is one that you want to hold over earnings, and you better know when earnings are. In other words, don’t just buy this stock because you think it’s going up; because it might go up, all the way up until the time that it goes down. So with McDermott ( NYSE:MDR ) the point is that this stock was not acting very well, and into earnings, if the stock hasn’t been really selling off, then there’s no technical reason to expect it to do a big pop on earnings, it might happen, but you’re hoping, you have no basis for that.
So with McDermott ( NYSE:MDR ), this is a stock that you really didn’t want to be holding over earnings. You should have some kind of discipline, no matter what it is, just have some of it and if the stocks close to hitting your stop, you say, “Well my stop is at $8.00.” Well your stop hasn’t been hit, but you’ve got a catalyst, earnings, if it’s a negative catalyst for the stock, the stop is going to gap right down through your stop.
So let’s say you have a stop set at $8.00; the stock opens up here tomorrow at 7.35. Do you think your $8.00 stop is going to get hit? I do. Do you think you’re going to be able to sell it at $8.00? I don’t; your stop gets hit even though it’s an $8.00 stop, 7.95, whatever it is, that just triggers a market order, you sell at the open. By the way, how many folks do you think are going to be figuring that out tomorrow? My bet is, a whole bunch of them. Do you think there are a few stops set at $8.00? Yes. Do you think some of them are set there in accounts of your buddies, your fellow retail traders? I do.
So you know what I think is going to happen tomorrow? I think this stock, I think, I’m not predicting, but this is what I’m looking for: this stock is going to gap down and it’s probably going to retrace some of this move. So what I would suggest doing is, if you’re not long the stock, if you are long the stock don’t sell first thing in the morning, just don’t; put a stop one or two percent below where the opening print is and just figure you’re already screwed for about eighty-cents, you lost this money, you lost this money from here to here, stick it out, ride it down for a couple more percent before you sell. My bet is you’re not going to be selling, you’re going to be waiting for the stock to come back up so you can get a little of your money back.
Now if you’re not long the stock and you’re looking for a trade I think you want to watch how this stock acts at the open, and then if three or four minutes later it is higher than the opening print, I think you’ve got a nice trade to the long side. A case in point, Deckers ( NASDAQ:DECK ), I was looking for what I’m looking at in McDermott ( NYSE:MDR ); the stock gaps down, looking for a move higher. I was looking for that same move in Deckers ( NASDAQ:DECK ), it didn’t happen. The point is this is not free money; when you see a stock gap down, you have to watch it. So in this case there really wasn’t any trade on Deckers ( NASDAQ:DECK ); I’m hoping that there is going to be a trade on McDermott ( NYSE:MDR ), but if there’s not I’m not going to try to make something happen.