Gap and Crap on Redhat (RHT)…and a look at Lululemon (LULU). (March 27, 2018)
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Just a quick look at Red Hat ( NYSE: RHT ) because it has actually kind of popped out of a volatility squeeze today; not textbook but pretty close. This could have been a really nice move except that the stock was already extended prior to earnings. And then, of course, the market just absolutely stunk up the joint today; just a really, really nasty market. But first thing in the morning Red Hat ( NYSE: RHT ) gaps up here, this is a 5-minute chart, and then after the stock traded below that level it really just slid the rest of the day.
The point of this video, and it is actually a pretty short one here. Just because a stock is popping out of Bollinger Bands that look pretty tight, these really weren’t THAT tight, not relative to where they have been before. You can look at this, a totally different thing, but also relative to the 50-day moving average.
This stock, while it might have looked pretty enticing, and it sure did to somebody because there were a lot of people that bought this stock and it only wound up $1.00 from yesterday’s close. But it looks pretty enticing right out of the chutes because it is a gap, it holds up a little bit. Ultimately this move away from the point of central tendency, which is the 20-day moving average here, this move doesn’t stand. It just won’t hold up because there has already so much buying pressure.
This has been a red-hot stock, Red Hat ( NYSE: RHT ) has been red hot (sorry about the play on words, kind of stupid), but the stock has already had a big move in anticipation of earnings. Once the stock gapped up here this was the time for everybody who already bought the stock to be taking profits; particularly on a day when the market, overall, was pretty week. Think about it, you are long the stock coming into today, you want your just rewards. You want to be making money on the stock. The stock gaps up, great earnings, you want to sell into those things.
Here’s my bet: We will have Lululemon ( NASDAQ: LULU ) probably doing the same thing tomorrow. It is a little different situation. The stock is up 6.5 percent after hours, you can look at see what has happened here. But already you are seeing this move after hours. A big jump out of the chutes up above 86.00 and now sellers are coming in saying, “You know what? I will take that money off the table.” It is up at a level that it has not seen in quite a while.
The bottom line is this: You have to just be aware of where a stock is in its normal trading range. Where it is in statistical probabilities of staying in a particular range. When it pops out of that range, most of the time, the probabilities are going to suck it right back into the inside. It happened with Red Hat ( NYSE: RHT ). It is probably going to happen with Lululemon ( NASDAQ: LULU ) tomorrow.
I hope this stuff works for you. Look, stay on the sidelines until things get a little clearer here. There is no shame being on the sidelines, I will probably see you there.
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