Here’s how to catch a falling knife and put it in your pocket. Check out this strategy on Netease.com ($NTES) (August 13, 2018)

by DAN NTES 
I want to look at NetEase ( NASDAQ: NTES ) here for a potential oversold bounce; I will tell you exactly what I am looking at. I am looking at this, not as a short, the last thing you want to be doing is shorting stuff that is down here in the penalty box. The thing about stuff that is in the penalty box is, the penalty ends and at one point starts to move up.

What I am looking at here is a POTENTIAL oversold bounce, and when I say potential I mean potential. Because guess what? This was a potential oversold bounce here, I think I might have even featured this, looking for the stock to move higher the next day and it really didn’t. In fact, it gapped up a little bit, then traded lower and then still traded lower on the day. This is a stock that is still desperately seeking bulls; it is desperately seeking buyers. As it goes lower, at some magical moment in time, buyers are going to come in. Maybe it is 210.00, I don’t know.

This would be my setup for tomorrow: This line here was established last week at this particular low here; right here and the stock fell below that level. So let’s kind of do the same thing again. We will put a line down here at 213.59. This is how I would make this trade tomorrow: If the stock gaps BELOW 213.59 don’t do anything; wait for it to trade back above 213.59. THAT’S when you buy the stock and then give yourself maybe a 2 percent stop, something like that.

If, on the other hand, the stock does not gap down but gaps it up above the closing price here of 215.79, if it moves above there then you go ahead and buy the stock but you keep a stop just slightly BELOW this 213.59. That is how you trade this.

The deal is this: This is a falling knife and you don’t want to try to catch a falling knife. But what you can do is wait for it to get to a point where it looks like it has maybe hit the butcher block. The handle is kind of shaking around a little bit; then you can go in and buy some of this stock. But to just buy this on the way down because you know it is going to go up, look, that didn’t work out well on any of these instances.

At some point, the stock goes up but you can’t tell me that you are able to predict when that is going to happen. I am telling you in the next day or two; maybe tomorrow, but maybe Wednesday. But in the next day or two, this thing will find a bottom; it isn’t going to zero. It is probably not going to 200.00 but we don’t now that for sure. So I have given you some strict parameters as far as how to trade this stock tomorrow. It is either going to work or it’s not, okay?

Free Chart