Watch for this pattern. It’s more common than you think. (October 23, 2014)
Let’s look at Groupon ( NASDAQ:GRPN ). If we’re looking at it right now you can see the stock is building a base, it has been for quite a while, and probably likely to build it for quite a while. It’s not a stock that I’m interested in, so why am I looking at it? Well, that’s an interesting question. Here’s why, because we want to take a walk down memory lane and be vigilant for this pattern in other stocks, but this is really instructive, let me go back.
What I’m talking about here, and I’ll walk you through it, what I’m talking about is a double top. Now you get confirmation of a double top, so after the pullback, and then it goes up and fails again, you get a confirmation of the double top clear down here where the stock literally, and I’m sure this was after their crappy earnings, the stock gapped down and then traded below here. So you wouldn’t have been able to say, yes it’s a double top, until the stock traded a little bit below $9.00.
By the way, if you decided to short it then, that was a pretty nice short, if you waited that long. But here’s what you want to do. You’ve got to look at this, look at the trend, nice uptrend here, the stock accelerated, turns out that’s the high. It fell lower once it hit this 50-day moving average and did not bounce, it had been bouncing every time before, but it did not bounce this time. Instead the stock fell lower.
So now you’re looking at this and you’re seeing a definite trend change. By the way there’s about 98 bazillion, maybe 99 bazillion stocks that look just like this right now. Ultimately though, the stock comes and breaks out. This, as the stock starts to move away, this is your first short entry here, because you’ve got a pretty good idea early on that this stock has peaked. It was trading well below the 50-day moving average here. The 50-day moving average is no longer trending higher here, it’s actually been trading sideways, and so you can get off a short with a buy stop just slightly above the top here.
So you get off a short with a buy stop then you can ride it all the way down, if you can hang on to your shorts that long. If you’re shorting you want to get in there, but the first sign for me, if a stock really starts to bounce, I will want to cover my short, and then consider putting on another short when it goes down here. It’s easy for me to say in hindsight, “Hey, short right here and then buy right here on the reversal.” But there’s a lot of stuff going on between here and here. If you’re doing it as a fundamental investor who likes to short stocks, that’s fine, but it’s just tough to catch this whole move. What it should be easy to do though is, not hold the stock after it’s done this; this is not where you want to be.
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