Here’s your trade on Restoration Hardware (RH). (December 03, 2018)
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I want to look at Restoration Hardware ( NYSE: RH ). If you owned this stock into the close today you’re pretty happy. The company reported earnings; the stock is up 20 percent, trading at about 148.00. It has been up as high, I believe as high as 150.00, actually higher than that, almost up to 155.00.
Here’s the thing, the only stocks I’ll own over earnings are stocks that I am either up a lot on and I have taken some off the table. And then I just feel like I have enough of a cushion to hold some over earnings. That is actually very, very rare that I do that. I typically don’t do that, not in my trading account. Now in my investment account, hey, you have to hold over earnings, otherwise, it is not really an investment account is it? So, of course, I do that. Nothing you can do about that, you are in a stock for reasons other than just the short-term chart.
On these types of things, I have found that over time I make more money by trading stocks AFTER they report earnings than before they report earnings because you can trade the extremes of the crowd. Now, I looked at the implied move of the stock based on the option prices, the implied move was around $18.00 or so, something like that. It amounted to $143.00 on the upside. Right around there is what the options market was saying. That’s where you could make money if you are selling options, at 143.00 or so. It’s not that complicated but it’s lengthy and I am not going to explain it to you now.
Let’s just put it this way: The stock right now is trading, let’s say it’s up at 150.00. It’s $7.00 above where the implied move is, which means that tomorrow morning there is a likelihood, don’t shut off the video now, you’ve got to listen to the rest of it, there’s a likelihood that if the stock opens up at this level it will trade down a bit and that would give us a good short.
It would give us an opportunity to short the stock with the idea being that the stock gaps up in the morning, shorts cover. And then at the same time retail buyers come in. Professional traders say, “Hey, I’m happy to fill that supply. It was at $123.00 yesterday; you want to buy it from me at 150.00? Fine, I’ve got your stock.” And so they will start selling and all that supply overwhelms the demand from the short sellers who are covering as well as the buyers who are buying trying to get in on a good deal before everybody else does (think Trading Places, Duke and Duke, hey, let’s go get in on it, that type of thing) and then the stock will roll over and you make money on your short.
Now, the reason I say you have got to listen to the rest of the video is this: Short interest is really high on this stock so a lot of traders are betting against this move. They are betting that the stock would not move up. Hey, we are doing some remodeling in our house. My wife went and looked at Restoration Hardware ( NYSE: RH ), I typically like their stuff (this is anecdotal evidence or whatever), she didn’t find anything that she liked in there. I would probably find a bunch of stuff in there that I like but I am not the guy that does the furniture shopping so take that for what it’s worth. I think there was probably a reason to vote against Restoration Hardware ( NYSE: RH ) and a lot of bears did, they’re going to be covering tomorrow.
This stock, even though it’s up so much you would really expect it to roll over, this stock could gap and run. It could just keep going because shorts are covering their positions and there’s a lot more of them that are covering than you might think they are. Also, those that may be short right at the open tomorrow, because you didn’t listen to the rest of my video, short. And then the stock is up at 155.00 they start scrambling to cover and that drives the stock up even more. Short squeezes are really, really chaotic but they are really fun if you are not caught in one.
So what I am suggesting to you is, you stand aside tomorrow. Wait for the stock to pick a direction. That direction will be apparent well before 9:35 tomorrow morning. Give it a couple minutes and you will have your direction. Whether this stock is a gap and run, in which case you can be buying the stock with a tight stop below the intraday high. Or a gap and crap, in which case you could short the stock with a stop above the intraday high. It is going to be one or the other. The stock will not be flatlined so you just have to wait for it and then let the trade play out.
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