Here are a couple of stocks that illustrate some key points of trading. Check out Etsy ($ETSY) and Molson Coors ($TAP). (February 13, 2019)
TAP ETSY
I want to look at two stocks the first of which is TAP, Molson Coors ( NYSE: TAP ) and the other is Etsy ( NASDAQ: ETSY ).
Let’s look at this. We traded TAP ( NYSE: TAP ) last May really successfully and here’s how we did it: First of all you will notice the horizontal line right here. The stock gapped down on crappy earnings and just continued to fall. Some folks made money on the short side but in my mind the easier money was made on the long side by just waiting, by seeing what was going on here and keeping in mind this is Molson Coors ( NYSE: TAP ), right? This is a company that they report crappy earnings and they are not going out of business.
You see how the stock trades here, horrible. Oh, I am going to buy this, I am going to buy this right here. Then the next day it goes down even further and if you are not patient you are going to ditch this stock and say, “You know what? I am not even going to look at this stock anymore. I don’t care.”
On the third day the stock firms up. The big money sells on the first day right at the open, actually, it had been selling all the way down. The bottom line is the stock gaps down and keeps falling. And so you are waiting. You should not be wanting to pick a bottom saying, “Okay, the stock has gone down enough.” You wait for the stock to tell you. The next day it goes down even farther. So that’s kind of late to the party but not too late folks that are selling the stock.
By the third day when this stock is up like it is even though it is not up a lot, about 2 percent or so not even that; it is up from the day before. You are not looking at how much buying pressure there is. You are looking at how little selling pressure there is relative to the last few days.
This is really important, if you can just keep this power cycle in mind, which is a concept that I came up with years ago, I have been teaching it ever since. It is an approach to trading, who is in charge? Where is there the most potential? Is there the most potential buying? Or the most potential selling pressure that is going to move the stock? It really just depends on how you are looking at a chart with price and volume, magnitude of movement, etcetera, etcetera.
The bottom line is this, by this third day the fact that the stock is up tells you that the aggressive selling, the “get me out at any price” selling is gone. A lot of folks thought it was this second day. It traded up and then lo and behold came down into the close at the end of the day. So let’s say you did happen to get in, a lot of people just ignore this stock; they’re done.
But let’s say you did happen to get in today, you might be tempted to sell it the following day saying, “You know what? I guess I was wrong this isn’t the bottom, I am going to sell the stock before it falls lower.” No, keep your stop down here; the third day here, the low is 58.75 so you keep your stop, that is why I have this line back here at 58.70, you keep your stop here and just let the trade ride.
This is what I was talking about then, I created this on April 4th, right here; 58.70 is where you stop would be. The stock just trends sideways and then ultimately moves higher. This is a nice smooth easy trade. Let’s say you waited until the end of the day as opposed to buying it at the beginning. Let’s say you waited until the end of the day; now you are up 7 percent. You might say, “Well, that’s not very much.” I say it is because this is a dang smooth easy trade. Then the stock keeps going and ultimately you’re up quite a bit, you’re up 16 percent. Again, in a nice smooth easy trade.
So now the stock is where? We are coming back to present day. So what are we going to do here? Well, I am looking at the same type of trade. First of all, we don’t care about this anymore it’s not relevant. So instead we look at this was the big nasty first day. This is the second day. Right now the low is 58.42 so you put a stop literally at 58.40 or at least an alert I wouldn’t put a stop there, let’s say 58.37. If the stock falls below that level then you want to be out.
My suspicion is that it is not going to fall below that level. But if it did, okay, well that’s fine. What have we risked? You have risked a point and a half, a percent and a half on the trade. What you are looking for is the same type of action we had here, which again, takes a while to happen.
So this is your trade for this stock. The trade in the first of the morning here, that was a trade that we looked at and chose not to take because it didn’t really have much of a movement. But now as I look at the stock and I see that it is stabilizing you have kind of a tradable low here. Just don’t expect a big 5, 6. 7 percent move. But this is a tradable bottom right here.
The other thing I wanted to mention is Etsy ( NASDAQ: ETSY ) and here’s why: Because I didn’t get shaken out of the stock I got stopped out. I bought this breakout back here on February 5th. I bought the breakout, the stock moves up and then it comes back around and I am stopped out. And then over the past several days I feel like I want to be buying this stock but I don’t because it violates my rules.
And then, sure enough, today, I was talking about this in the morning, you almost kind of want to buy Etsy ( NASDAQ: ETSY ) again because the stock is up. But decide not to because again, it violates my rules. And what are my rules? My rules are when a stock does this on a big breakout and then closes at the bottom of the range that is a breakout from a squeeze that has failed. That means there is a lot of resistance up here.
So as this thing runs into this zone a lot of retail traders are going to get sucked in there wanting to buy this stock. And I say no, you stick to your rules; don’t call audibles along the way. Stick to your rules and that will keep you OUT of a stock that, well, 1.1 million shares changed hands so for every seller there is a buyer. There are a lot of shares here who were bought at the wrong time.
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