Want to know how to catch a falling knife? Check out Qualcomm (QCOM). (August 01, 2014)
I want to look at Qulacomm ( NASDAQ:QCOM ); happily not because I’m long and I’m wondering how far down this stock is going to go, but rather because this is actually kind of representative of a lot of things in the market these days. They say, they, meaning a lot of people, say you don’t want to try to catch a falling knife. This pretty much looks like a falling knife to me; it definitely looks like a falling knife to me. You don’t want to catch this right?
But here’s what you can do, you can really take a good look and see if maybe this is a falling knife that is closer to the butcher block than you think, and the butcher block doesn’t have to be your hand. First of all the market didn’t like the earnings release, the stock fell and bounced along to 200-day moving average, did not bounce much. I had mentioned before that this is not a strong bounce; this is not good.
So what happens? On Thursday, and this isn’t an “I told you so”, anybody who is reading charts can look at this stuff, this is not cutting edge stuff, it might be for you, but this is not cutting edge stuff. We get a breakdown below support, many stops were hit, guaranteed, guaranteed, and I’m going to show you where to place one in a second here. So many stops were hit, big down day on Thursday, that’s day one, big down day on Friday, that’s day two.
There’s such a thing as the rule of thumb, I didn’t invent it, you can read a book by Buzzy Schwartz, I think it’s “The Pit Bull”, he talks about a three day rule, I’ve modified it to the three day rule of thumb. Because of the nature of what I do members are always, and it’s totally understandable, members are always looking for tried and true rules so that they can automate their trading.
Unfortunately it doesn’t work that way but the idea is, the real smart money sells on the first day, that’s the big money, the semi-smart money, they kind of figure out what’s going on, they sell on the second day, finally on the third day the only folks that are left to sell are the ones that have been holding this on the way down; then they finally freak out and they wind up selling at the bottom and the stock bounces.
So that’s what I’m kind of looking for in Qulacomm ( NASDAQ:QCOM ), but just to look at this chart would not be enough to get me in, that’s just not my deal. If we go down to a 5-minute chart and forget about the moving averages, they’re not relevant. I’m just too lazy to change them; You look here and this is what I’m looking at; the stock was drifting all the way down until 1:05, one last gasp at 1:00, 1:05, this is when to volume maxed out on the downside. And then what happens? The stock trades up, first bar on big volume, and then it gets drifty the rest of the afternoon. A big buy on close orders here, lots of buying right at the close.
My bet is that this is the bottom, 71.82. I think you can buy this stock, you keep a stop just a little bit below 71.82, lets call it 71.75, how’s that for defining your risk? You keep your stop here and then what you’re doing is, you’re buying a stock that has absolutely gotten crushed, that’s gone down over 11 percent, lost 11 percent of it’s market cap on one nasty earnings number, it’s still Qulacomm ( NASDAQ:QCOM ) guys; so you’re able to buy this stock, who knows how far up it’s going to go, but you’ve got a defined risk right underneath Friday’s low, that’s where you buy this stock.
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