Here is your IPO trading strategy on $CAVA – July 11, 2023
This is Dan here at StockMarketMentor.com. I’ve been getting a lot of questions today, in our trading room, about CAVA ( NYSE: CAVA ).
Now, I have never eaten at this restaurant, I know nothing about this. But when I get questions about a stock like this the first thing that comes to my mind is an IPO strategy. And so this is a good one to go through because this could lead us to a pretty good trade here.
First of all, woulda coulda shoulda. You can look at this and say, The best time to buy this was down here at $38.00. And I would say, Well, actually, no. If we are going to go that way, the best time to buy it was really down here right at the bottom at 36.50. You don’t get to make that trade, if you did that’s awesome, but you probably didn’t.
And the same thing here, this was the time to buy it on this bullish engulfing pattern. If you had done that you would be up almost 20 percent. So what are we doing here, why are we looking at this stock? It has gone up too far, it’s too choppy, stuff like that. And it is if you really want to see choppily chop, look at that, what are you going to do with that?
So I look at this stock, and I do see a big old “W” pattern, but I also see a stock that has run 23, 24 percent over the past several days. But this is the IPO strategy that I have, I figured this out a couple of decades ago and it works really well. We will look at the intraday charts in just a minute and I will show you how to really trade this. The idea is this, when a stock first goes public it is typically going to reach, what I call, an enthusiasm high. Where buyers come into the market, all the insiders are dumping the stock, and taking their profits. Because they have already been in on a good deal so they are getting out.
Meanwhile, the newcomers are saying, This is my chance, this is my chance to get in on this before everybody else does. So this big demand builds up, very aggressive buying, it goes up. And finally, the last of the retailers are in, and the institutions are going, I am not going to buy this stock, no thank you. And so at that point, the move has gone up and then it starts to pull back. And so then you look at this and this, right here, is what I call the enthusiasm high. It is the peak of enthusiasm for a new IPO, and then the stock falls back.
Now here, this actually occurred on the first day. But a lot of times, you will see a stock open up, IPO, and then keep going, and going, and going for days or even weeks at a time, until that aggressive demand, right from the get-go has kind of petered out. All the demand is filled, and then at that point, the stock pulls back.
It doesn’t matter what the timing is, I just look at when a stock and you can’t see it in advance, obviously, I look at when a stock first peaks after the IPO. After the day when the stock begins to be traded publicly and I use that as a reference. And so for here, this is how this works, the high on this first day of trading was 47.89, so we will just make it exactly, 48.00.
So this is now the established resistance for the stock. It hit its high on the first day of trading. And so as I look at this stock right now, would I want to buy the stock right here? No, I really wouldn’t. Because when we see this as the high back here, then we have to look and say, what’s the upside on this stock before it is likely to hit some resistance, and it is like 3.5 percent.
Then on the downside, what if the stock pulls back? Well, if it just goes back to yesterday’s low, that’s a 12 percent move. Even if it just pulls back to today’s intraday low, that’s almost 6 percent. And so, if you are just doing the math, if you are just giving the stock a cursory look, you can see, assuming this is going to be resistance, you can say, Well, I think it is going to go up to $100.00.
Okay, well good for you, I don’t. I think it is going to hit some kind of resistance here. That is when, as they say, the rubber meets the road. If the stock breaks through 47.89, we will call it $48.00, if the stock breaks through $48.00, then we are in blue sky territory. Everybody who owns the stock is a winner, and we like winners.
We like it when the buyers are the wind beneath our wings, and we are riding on to victory. So that is when, that’s when I look at this, at this resistance level, as actually being really critical. All I see now is, just a method of calculating my potential reward if the stock moves in the right direction. And you can see, even as I am talking about this, it is really stalling out.
So the risk of losing is much higher than the gain that I am going to take before the stock hits formidable resistance. So this isn’t a good trade for me. Now, if the stock breaks out above $48.00, if we are getting this kind of deal, then I am in. Then this is my IPO strategy, wait for the stock to break out above the enthusiasm high, as I call it, and then that is when the best time to buy the stock is.
Again, assuming you didn’t theoretically buy it right at the low here, this is the next trade. Right now, this is not your trade, your trade is when the stock rolls higher. Now, if we look at this on an intraday basis, when I started doing this video the sellers came in and pulled the stock down about $1.50, but it gives you a good idea here of what’s happening. Here’s the 5-minute chart here.
The orange line is the volume-weighted average price. If a stock is above that level during the day, it means that buyers are in control. If a stock is below that level, it means that sellers are in control. So right now, on this orange line, we could expect about 45.40 to be formidable support for the stock.
It is not a lead-pipe cinch, but it should be a good level of support. If a stock falls below that level, then, well the buyers have shot their wad and now the sellers are controlling the stock. So, so far, on this 5-minute chart, the stock is still looking okay, albeit having pulled back almost 3 percent. Again, just over the last 20 minutes or so.
On the 15-minute chart you see the same thing, a pullback, so entry is everything. The volume-weighted average price is still holding. Here’s the 30-minute chart, we see what’s happening here, the volume-weighted average price is holding. On the 1-hour chart, this is more concerning. You can see this, all these open boxes, green, happy day, happy day.
The stock trades down a little bit and then it runs clear up to 47.00 and is now pulling back. So as I look at this, I see the stock still looks good, it looks pretty good, but not today. I am not going to buy this stock today because as I see this, it has an equal chance tomorrow of going down as it does of going up. And that is not a trade that I want to take when I see resistance right up here.
Anyway, I hope this technique helps you. When the stock is getting close to the enthusiasm high you seriously have no advantage in buying the stock early. You have no advantage whatsoever. It doesn’t make sense because the stock is pretty close to where the logical point of selling is.
So you wait until the stock hits that logical point of selling and then breaks through. That tells you, all the sellers have done their deal. Now all we have is buyers, and it’s all good.
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