Here’s your trade on Lumentum Holdings ($LITE) (May 05, 2020)
LITE
Let’s look at Lumentum ( NASDAQ: LITE ); they reported earnings this morning and the stock was initially down, briefly. And then it ran up pretty much right away, it was down a little bit, then it spiked, and then it came back down and then it just ran. It traded sideways for most of the day, but the first hour or so was pretty sporty.
So now, what are we going to do with this stock? I would suggest setting an alert at $85.00; if the stock rallies above $85.00 then this would be a breakout. Now today this traded on volume, which you would expect on earnings, there are a lot more stocks changing hands. I wouldn’t buy it now at 82.00 it’s $3.00 below resistance. We want to see the stock break out above 85.00 and do so on volume. This may not happen tomorrow, it may not happen at all. It may not happen tomorrow or the next day but if the stock can just kind of tighten up here a bit then I think we could get a really nice opportunity for this stock to work.
This is something that I first looked at back here when the stock had been trading here. I had kind of drawn a trendline talking about buying the stock on the breakout. That turned out to be a good trade. It rallies up and then it comes back to do what? It comes back to test that trendline. So now this trendline, which had contained the stock before it broke out is now acting as support here at $77.00. So you are buying the stock right here anticipating a breakout. But realistically, you have less than $3.00 of headroom before the stock hits the ceiling, that’s when you are hoping the stock will break out. You really just have 3 percent or so of upside.
On the other hand though, if the stock pulls back here to $77.00 it is still acting normally, it is still within the trading range. Even if it falls down here that would be to last Thursday’s low, it is still within the trading range, just at the bottom of the range testing support again. That is down 7.5 percent. So you see why I am saying don’t buy it here; because of your possibility of loss, for putting your stop somewhere where the stock will only hit it if it is acting the way it is not supposed to act.
In other words, if it is doing something wrong you have to put your stop clear down here. So there is not enough potential reward for you to take that risk right now. That is why you want to be buying near support if you can. Such as here I outlined the trade the way it is so the stock holds firm at this support line here. Now you are buying down here, you’ve got your stop that is, say, $3.00, you could even keep it tighter around $76.00, you’ve got a stop at about $3.00. And then on the upside, though, you have got a potential for $6.00 so that is a better risk 1 to make 2 than it is up here, risk 2 to possibly make 1.
That is how I would be trading Lumentum Holdings ( NASDAQ: LITE ). Wait for the stock to break out or if it pulls back here one more time then take it. But this is a potential right now; it’s not a trade, it’s a potential.
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