Here’s your trade on Herbalife (HLF). (July 22, 2014)
I want to talk about Herbalife ( NYSE:HLF ) here. First of all technically the stock is right back up at the 200-day moving average. The stock had been in a volatility squeeze, a really, really tight trading range reflecting really low volatility. Then last week the stock breaks out of this, again I’m just talking about the stock; I’ll get to the “whys” in just a second. The stock breaks out of this volatility squeeze and this is what happens, a lot of times we’re in a bull market so I like the ones that pop up like Skyworks ( NASDAQ:SWKS ) for example, but here the stock just blew out of this to the downside and kept going.
The way you would make a trade like this is, you go ahead and short the stock. You’re not going to go long the stock as it falls out of a volatility squeeze, because if you are you’re going to always be relegated to getting the Free Chart videos as opposed to getting the Premium videos, because you’re going to have no money to trade. You don’t go long a stock that’s falling out of a volatility squeeze, you look to short the stock, but then you put your stop, you’re buy stop, the “Oh crap I’m wrong” level, right inside the trading range. Because the whole idea is that if the stock gets back up into the trading range then this was actually a fake out it wasn’t a breakout. So you don’t need to put you’re buy stop way up here, you don’t have to because you’re going to know you’re wrong before the stock hits this level, you’re going to know you’re wrong here.
So that’s how you would really trade this. Now I’m not talking about holding your short, let’s say you shorted here, the stock comes all the way down to $52.00 and you’re waiting for “Inspector Ackman” to go ahead with his report that’s going to change the world and it’s the report of his life and the stock is already down almost 20 percent from where you shorted it. You’re not just going to stay short. In other words the stop that you place, the buy stop that you place should not be hit today because you should be out of this trade. When you’ve got a stock that falls like this you need to be watching this thing very carefully.
Let’s look at the intraday range here; we’ll see what it’s like on a 15-minute chart. So you’re short the stock back here, you see it accelerate to the downside. At the first sign that the stock is moving up on volume what is that telling you? This here is way different, I mean this is way different than anything you’ve seen before; and after a big move down this tells you that it’s time to get out. So at the very highest, at the very highest you should have covered below 57.00. So you’re short the stock basically at 63.00 or something like that, you made $6.00 by holding the stock as long as you possibly could before it became obvious that you were wrong.
Frankly, a better analysis, and if you’re short a stock that’s plummeting like Herbalife ( NYSE:HLF ), you need to be mindful that there’s going to be a snapback rally, no question about it so you need to be watching it close, you’ve got to babysit this thing. In the forum today I saw, there were several comments, I made a few comments on Herbalife ( NYSE:HLF ) but a lot of members beat me to this here, the actually showed signs of reversing here at a little after 10:00; first thing this morning, and I’m sure it’s when Bill Ackman’s report, when people first became aware of what his report actually was about, which was not much. But then when you see the stock reverse like this breakout of a volatility squeeze you’re not getting out at 57.00, you’re getting out at 55.00. So that’s how you should be trading a stock like Herbalife ( NYSE:HLF ).
So now what do you do? Do you go ahead and get long because the stock reversed? No, you don’t, because where was the stock prior to this plummet last week? Well it was in a volatility squeeze. Now the stock’s still in that same level. What is the upside catalyst? Is Herbalife ( NYSE:HLF ) going to come out and say, “See, we told you so”? I mean there is no upside catalyst until earnings, and earnings are going to be announced next Monday. We could see the stock trade up into earnings, you know this is going to be a highly watched stock, but you should just basically be out of this stock.
If it starts breaking out above this level then you go ahead and go long the stock, but it’s only for an earning trade. I’m sure there are certain aspects of Ackman’s observations or his deep undercover, like deep black ops investigation over how Herbalife ( NYSE:HLF ) is taking advantage of and exploiting poor people in Latin America. I’m sure there’s some truth to that, although by the way, welcome to corporate greed, it’s not like they’re the only corporation in the world who exploits poor Latin American folks; or just poor folks in general, so there’s really not that much meat to it.
What’s really going to happen is now it’s all about earnings; just what is the company’s forward guidance going to be and this and that and also what’s the short interest. The last estimate here on TC 2000, the short interest is essentially twenty-three days, meaning on average volume it would take the shorts twenty-three days to cover. According to Yahoo there’s 35 percent of the float that’s short, that’s a pretty hefty short interest. I’m sure there are a lot of shorts covering today, so that data that I just mentioned certainly doesn’t still apply, but there’s probably still a lot of short interest.
By the way there were probably folks that were shorting this today as well, you know these were not all just natural sellers, “Oh, I get to get my money back”, so there’s probably some shorting going on today. You could very well see this stock blast off next week in reaction to earnings. But here’s the thing, this is Tuesday, we’ve got like four trading days before the company announces earnings, which I believe is after the close on Monday. Anything can happen, I think you need to be out of this stock until and unless it breaks up above this volatility squeeze, then you go long for a trade.
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