Looking for a breakout buy? Check out Yelp (YELP) (May 13, 2016)
I want to look at Yelp ( NYSE:YELP ) today in this free video. This is why: Because the stock reported great earnings, and if you didn’t grab this thing right away you kind of missed it. A big breakout above the 200-day moving average; it barely looked back and kept going. Now we can look at it and say, “Oh, there was no follow-through,” so this is a busted move. No, it’s actually not. Volatility squeeze, earnings breakout, a breakout on fundamental news, “Oh gosh, I missed that. I’m not going to buy it at 27.00, I think it’s gone up too much.” So what do you do? You look at this and say, “I need to see if this is going to hold above this breakout level, this area here.” I believe I covered this a week ago after this stock did this. My suggestion was that you need to use the 200-day moving average as a reference for stops. Like right here, this was up over 10 percent, 11 percent above the 200-day moving average. Well you don’t want to buy, just as a function of discipline, the stock could go up to to $40.00. And you know what? Chalk it up to missed opportunity. Fret not, you’ll have many more missed opportunities in your trading career.
But you don’t buy the stock up this much unless you’re trading it, you’re watching it, you’re using a tight trailing stop. But instead you just let your discipline be your guide and say, “I just want to make sure that this breakout is real, that it’s not going to be one that just moves lower.” And their earnings were really very, very surprising to most analysts. So this was, I would say the end of phase one of our squeeze. Phase one is the initial breakout. Phase two is, when that breakout ends, how much is the stock going to pullback? So then we get, “Oh, this is a flag pattern. Maybe it moves higher but I think I have got to wait to see it, because we’re still pretty extended.” And then now we’re down here, and this is Wednesday, “Oh, okay, well definitely can’t buy it here, I’ve got to wait and see if this level holds.” Now we’re in to Thursday, “Can’t buy it here because I’ve got to make sure this level holds. So I want to see somebody coming in before me, because I don’t want to be the first guy out of the foxhole.” Boom! There it is on Friday, we get confirmation that there’s a breakout, there’s a phase two pullback, and new support is right here at $24.00. Or the 200-day moving average, whatever.
So does this mean for sure that the stock is going to move higher because we have confirmation? No. This is a way to manage your risk. Now you’ve got a clearly defined, “Oh crap, I’m wrong level.” And that’s right here. If you’ve decided, as I have, that this is new support for the stock, that this is when buyers come in, then you can buy this stock and put a stop fairly close to that level. You can put it down here, $1.50 below where that level is. Or you can buy fewer shares and put it a little bit lower if you want. But the point is, your technical reason for buying this stock is a breakout, a pullback that finds support, and now we’re anticipating that. So if you have this plan, if you have thesis, this theory for what the stock is going to do, then you know where to have your risk management tool. You know where to have your stop loss. You’re going to have that at the level, where if the stock hits it you’ll say, “You know what? I’m wrong. I’m wrong, maybe I’ll buy it again at a lower level. But my reason for buying has been negated. So I’m just going to close my position, treat it as a business expense and move on.”
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