Here’s how we traded iRobot ($IRBT) this morning. (October 23, 2019)
IRBT
I want to show you a trade that we did on iRobot ( NASDAQ: IRBT ) this morning. The company reported, obviously, earnings that were disappointing. The stock gapped down almost 20 percent as it turned out. I had mentioned this in my morning note and then we were posting about it in the forum.
You see how fast this stock rallied after the open. It opened up and hit $44.00 as the low. I love it when a stock moves like this to such a big extent and then prints an even number for the low. What that does is, it tells you there are a lot of limit buy orders right here, as in, if this thing hits $40.00 I’m in. So there were a lot of buyers that came in at $44.00 and then as the stock starts to move higher you feel more confident in that $40.00 level. So you are buying the stock somewhere around here and then you are keeping a tight stop on it.
Typically what happens with stocks, it’s not really any different than on an intraday basis than it is on a daily basis, where a stock will move up to a certain extent and then it will drift lower on profit-taking. The question is, is it going to completely reverse like that? Or is it just going to do as iRobot ( NASDAQ: IRBT ) did, just kind of gently come back, retrace a part of the move, and find some new support? And then the question is, will it go higher or will it just kind of drift around here?
Obviously, you can see what iRobot ( NASDAQ: IRBT ) did. But here’s the thing you have got to understand, you don’t know what it’s going to do in advance. I can draw all these goofy little lines and make myself feel better but I don’t know whether the stock is going to do this. What I am telling you is, this is the typical reaction, a move up, a little pullback and then a move here. So you have got to really expect this part of the move.
The reason I am saying that is because if you are looking at a stock first thing in the morning and you see it run-up and let’s say you are kind of new to trading, and you are not buying the stock, you’re not buying the stock. At some point, you have to understand that the stock is just about ripe for a pullback. We don’t know whether it’s going to be here but you know that’s the case, you’re kind of late. You are buying it here at 44.00, that’s great, but the stock is up 7 some percent from the open. Trading volume is really good, a higher number here, which we like. If you are buying now you are not thinking about the typical move that a stock makes, which is again, on a big slam play like this it will typically up but then at some point it is going to roll over a bit.
We don’t know from this point which way it is going to go but virtually every single time you see a stock trade down like this at the open you are going to see, on the rebound, at some point the stock is going to rollover. So again, I have got to say it because it is really important, we don’t know what’s going to happen here, whether the stock is going to move up or whether it’s going to move down. But we darn sure know that this is going to happen.
The further up a stock climbs the closer you get to the sideways drift, which means the bigger the risk is that you are actually buying high, it’s an estimate. And then finally, so the stock does this but imagine, you are buying at $48.00, $49.00, now ultimately you are okay on the trade but you didn’t get to make the big money because you bought late. In fact, what you have been doing is, you have to hold this stinking stock all day. It pulled back 5 percent, you bought it too high but you are not stopped out. The stock is not really giving you much of a reason to get out. And then finally, ultimately it closes up near the high of the day.
This is just a very, very common pattern in trading that you will see stocks make intraday, which is why the course that I teach on day trading isn’t called day trading, it’s called The 59 Minute Trader. The idea is that you are in and out within the first hour of trading and as you can see here often much less than that. Here the stock peaked at 10:00 and then for the rest of the day it drifted sideways.
I traded this and I had a pretty good trade on it but I didn’t hold it all the way up to the top and my stated reason in the forum was, guys, I am selling this stock now because I have better things to do. I just got back from a week out of town, got a lot of other work to do on trading and I just don’t feel like babysitting this stock. So I took my few points and left, and that’s the way it goes, and I feel real good about the trade. What I would not have felt good about is, if I had bought it up here and then had to ride this thing during the day and always be looking at it.
Entry is everything; right off the bat, first thing in the morning, the first few minutes is when you want to take action. And then at that point you have got to start looking at your clock; you have got to start looking at the clock, the play clock is running. At some point in the next hour you have got to be looking to sell the stock before you get this kind of move.
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