When your gap and reverse doesn’t reverse, just be patient. Check out the two day action on Weight Watchers (WTW) (November 05, 2018)
WTW TAP WTW
You are going to be seeing, and we have already seen, a lot of stocks like this that do just what Weight Watchers ( NYSE: WTW ) did. Where they report earnings, stink up the joint, the stock keeps moving south and then at some point stops, in this case, because the closing bell rang. That’s it. The stock closed down at $48.00; over the weekend you are thinking about it and you say, “Well, you know, I was watching this on Thursday. After hours the company reported earnings and stunk up the joint.” The stock started trading lower and I thought, okay, I am going to look and buy this stock if it rebounds in the morning.
So you are watching this stock on Friday morning, I know I was, you were, weren’t you? You are watching the stock and you are looking maybe to make $2.00, $3.00, or $4.00. This could be a really, really nice oversold bounce, $68.00, opens at $55.00, that is a really serious dislocation. The rubber band is stretched really, really tight; I am going to buy me some stock. I am talking about right here at $55.00. When the stock had closed here on Thursday, reports earnings, bad. The stock opens up the next day down 20 percent. That’s a screaming buy, isn’t it? Well, it turned out not be a buy. So the stock continues down and then it closes, basically, at the low of the day or very close to it.
Now, at about 9:35 on Friday morning when the stock doesn’t rebound you might be tempted to say, “Okay, well the heck with this. That was a trade that didn’t really take off so I didn’t take the trade. There was the setup but there was no real signal or a trade trigger to get me in so I kind of wasted my time watching it I will take it off of my screen.” No, don’t do that.
When you see a stock trade down like this it isn’t going to zero and so you just have to wait for it. Then, boom, Monday comes; the stock is up over 7 percent. It was up over 7 percent from the close not from the open. The stock actually opened down a little bit and it was up over 8 percent from the opening to the close. So what I am doing here is, I am showing you, I want you to look at this, this is how the stock traded on Friday and then this was it on Monday.
You have to look at where the stock closed yesterday; we’ll say it closed at 48.16. This is where the stock closed. Now, this morning, and I don’t know if we will get the prices exactly right but this morning the stock gapped down just a little. If you are just looking for gaps you are not going to find this. You had to already have it on your screen and have a plan set up to make this trade. The trade was actually on Friday morning; it was the trade that you didn’t make but it was a decision and an action thing. Where you make your decision that you are going to trade the oversold bounce you are just not going to take action on it until you get your trigger. So the setup was there, where the stock got deeply oversold but it never really started rebounding. And so you stay away from it and you wait and you wait.
So first thing Monday morning comes and the stock, it did kind of gap down slightly, very slightly, and then started trading higher. As soon as the stock, that has this type of a setup, gaps down and then trades back above the prior days close, that is your entry. It is a really cool entry because your risk is defined like this. The stock is 20 percent down on Friday morning and then it kept falling all the way down here to close here. And then you are waiting for the opportunity to buy this stock at the first sign that buyers are coming in, right? And that is Monday morning.
How will you know you are wrong? Well, the stock is going to hit a new low. Happily, you are in here as opposed to getting it here. And then how do you know if you are wrong if you are buying here? Because the stock hits a new low clear down here. That’s way too much room to give a stock. You like these types of entries because you can get them so close to the bottom that it gives you real staying power, and then the stock worked really nicely all day long.
I want you to look at these types of trades. Don’t just blow them off in the morning. If the stock gaps way down and doesn’t rebound, don’t just take it off your screen, put it on a list of potential oversold bounces, call it a dead cat bounce, whatever you want to do. You are going to make money on these.
I remember several months ago we did this on TAP, Molson ( NYSE: TAP ). Where it was a very, very similar thing with a little bit of a twist here. The stock gaps down, kept going and then the following day continued to go. You just look at this stock and say, “This is really, really oversold, down almost 20 percent. I think I am just going to wait for this and see how it works out.” And then gradually you see that the stock is finding a bottom. You buy the stock somewhere here and the next thing you know you have got a nice 20 percent trade.
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