Looking for confirmation of a breakout? Watch what happens when the stock splits 3:1. Here’s your trade on Sherwin-Williams ($SHW) – April 5, 2021
SHW
I want to look at Sherwin-Williams ( NYSE: SHW ) here. They make awesome paint, we have got it all over our walls. But what I am talking about here is the way this stock has broken out. You can see a big shakeout here at the 200, it gathered itself right around the 50-day moving average. Since then it has run up, pulled back, and now it’s breaking out to a new high; big deal, we see that in a lot of stocks.
What’s impressive to me is, the stock split 3:1. Back in the old days, in the late 90’s, you didn’t have to be particularly smart to make money in trading. You just had to have a pager or some information that told you when a company was splitting its stock. You buy a bunch of calls and the next thing you know old Jed’s a millionaire. Stocks would go up on stock splits like it was just stupid how they worked. And then they stopped working and of course, a lot of the people who thought they were so smart turned out to, let’s just say they weren’t so smart.
Over the past decade or two, we’ll say, what has happened is the market has kind of got a little more sane and when a company splits its stock this is what you have to look at as a trader. You see the stock has been running up a lot, just 15 percent, fine. We want to know whether a runup is due to the company being so awesome that everybody wants to buy the stock or maybe it’s just illiquid. Maybe there aren’t that many shares to buy and so anybody who wants to buy a stock, here, Sherwin-Williams ( NYSE: SHW ), anybody who wants to buy the stock has to pay up for it.
This kind of artificial demand, it’s not really demand it’s just lack of supply, this gives the appearance that the stock is really strong and in huge demand. And then what happens? A company splits its stock, that marks the high, you’re done. The stock starts drifting lower and lower and lower. Why? Because the only reason the stock had been going up was because large institutions had to be buying a greater percentage of the float than they typically would like to.
So when the float is increased like it was here on a 3:1 stock split on April 1st, and the stock is up more today, this is a good sign so I want you to take note of that. Just know that these stock splits can actually mark the top of a stock. But they give you good information, if the stock does not pull back then you can buy with a little more confidence.
I would say here, I would be buying with a little more confidence. I would keep my stop just a little bit below the April 1 low, 244.67 is the low, I would put the stop at 244.60. Right about there, you have got about 4.5 percent risk, that is not a bad risk on a stock like this.
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