Are your expectations not matching up with reality? Well, this video should set you straight. (J..
Discussed in this article: Owens Corning ( $OC )
Let’s look at different trends today. Specifically, how the chart has to manage your expectations. A lot of times I think what newer traders fall prey to is, they kind of have the same expectation on every stock. It varies with the individual, some expect the unexpected and they just think, well the stocks ticking up, I’m bullish on the stock, I’ve had too much coffee this morning, and they expect the stock to go to the moon. Others short any company or any stock where the company announces bad news, because they think it’s going to zero. Still others have muted expectations, where they really don’t expect much at all. I think a lot of it just has to do with a lack of consciousness of some pretty basic things.
I want to use Owens Corning ( NYSE:OC ) and Mastercard ( NYSE:MA ) to illustrate this point. This is a chart showing the last candle here is Wednesday, which is the trading day after Owens Corning ( NYSE:OC ) announced earnings, they missed revenues, and they announced that before the market opened. You can see the stock traded wildly, it wasn’t really down too much, a little over one percent in response to some really lousy earnings.
So Cramer had the CEO of the company on “Mad Money” last night and his thesis was, “Hey, you know if the stock doesn’t trade down after announcing bad earnings then it’s a buy.” Now, there was more to it than just that, but generally speaking, that was his take. I talked with Brittany Umar over at TheStreet.com this morning, I was doing a video on this, and this was the point that I wanted to emphasize. Look at this chart, we go back to 2011 and you can draw a line here, you can say, “Well generally the stocks been in an uptrend, bottomed down here at 18.00 – 19.00, we’ll call it $19.00. Now it’s almost doubled that in how many years? What, two years? Over two years, so a nice uptrend, right? Well not really because it’s just in a series of really, really choppy consolidations. This was pretty ugly, this is tough to trade, and this is tough to trade. Now the stocks down at support, but if you’re a trader this isn’t your stock, even though the stocks basically doubled, more than doubled at the peak; this is not your stock if you’re a trader.
If you’ve got a short time horizon, if you buy a stock one day and then go back and look at the price later that day, check it the next day, check it two days later, this is not your stock; even though the stock has doubled. The reason is, because of the way it trades. Long periods of consolidation that generally establish higher lows. Here was a low; this is, at least as of now, a higher low, right? I’m going to move forward here and we can see today’s action where the stock is actually trading lower despite Jim Cramer’s bullish call on it.
So this is, I would say, a stock that moves down in reaction to good news is a stock you don’t want to own. The point is, when you see a stock like this bump up against support, okay great, that’s the time to buy it. Well before you buy the stock make a decision. Do you really want to buy the stock? Is this a stock you want to own or as a technician, as a chart guy, is this a chart I want to buy? My answer would be no. Now if I want exposure to the construction industry, exposure, I’m not talking about a trade, if I want exposure, then fine, buy Owens Corning ( NYSE:OC ), knock yourself out, buy MasTec ( NYSE:MTZ ), buy Masco ( NYSE:MAS ) buy any of these; they all trade a little bit differently.
But getting back to Owens Corning ( NYSE:OC ), is this is this the stock you want to buy? Do you want to have exposure to that industry? If this is your best one fine, have at it. But if you’re a trader, don’t go anywhere near this stock, because it has not shown, in the past, a propensity to reward somebody who really buys at support, not as much as others. Sure you buy at support, you make a little bit of money.
Instead, compare that with a stock like Mastercard ( NYSE:MA ). This looks more like an arrow going up at about a 30-degree angle, it looks like a nice little take off here. This is a stock that’s a bit more difficult to buy, because you’re always kind of wondering, this has gone up so much, am I buying the top? This is a pure momentum stock, there’s nothing wrong with Mastercard ( NYSE:MA ) at all. This is not a momentum stock; this is the one that you put in your portfolio and once a quarter you look at it; again, not my kind of trade. A stock like Mastercard ( NYSE:MA ) works; a totally different sector, what I’m doing is comparing charts here.
So the real lesson here today is this; before you buy a stock know what your expectations are, have an expectation, and make sure your expectations are reasonable, and make sure they’re consistent with the chart. If they are not consistent with the chart then just admit it, what you’re doing is predicting; now you’re in the fortune-telling game where you are predicting that the stock is going to behave differently than it has in the past; its going to go from a stock that’s just kind of grinding around, wearing you out, all of a sudden it’s going to start shooting straight up. Typically stocks don’t do that, they trade with their certain characteristics and this is why you want to be sticking with stocks with nice established momentum like this, and here’s why.
Once the momentum breaks, then it’s time to move on. A stock like Owens Corning ( NYSE:OC ), fine, once support is broken, then is it time to move on? Well, support was broken here, dipped down a little bit, and then ultimately it went higher. This is just more chaotic; generally speaking the trend is higher, but it’s really a chaotic chart. So if you want to just make money, you would be well advised to stick with stocks like Mastercard ( NYSE:MA ), Visa ( NYSE:V ), these are all moving really nicely. Even Bank of America ( NYSE:BAC ), different characteristics, but generally speaking you can see the trend.
Now let’s use this is an example, what’s my expectation on this, based on prior price history? Well, this is what I know based on the chart. Pullbacks to the 50-day moving average have generally been the only time to buy this stock that’s trending higher. You could have made other buys, you could have bought the stock here, you’d be making money, but this isn’t how the stock trades.
So would you be buying this stock here or selling it? If it was me, I think ultimately Bank of America ( NYSE:BAC )moves higher, but if I’m a trader it’s actually not a trade, it’s more of an investment; long-term calls on this thing. But if I’m a trader I’m not going to buy this stock here, because it’s been shown, in the past, to move above the 50-day moving average and then drift back to it. So this is a stock, once you frame your expectations, you wait for the stock to tag the 50-day moving average and that’s when you buy it.
With Mastercard ( NYSE:MA ), you wait for the stock to maybe tag the 50-day moving average, but generally speaking you just buy it more towards the middle of the range, like the middle Bollinger Band here, and just let the stock do what it’s going to do.
Owens Corning ( NYSE:OC ), sure you can buy it at this support level, but you better not expect much of it. You don’t expect the stock to do this; it’s not really done that before. Instead, you frame your expectations, maybe the stock will move up to 44.00, maybe it will just go up to here, because after all, the last time it hit the 200-day moving average, that’s all it went. Then it tagged here again, in response earnings, and now it’s actually falling lower. So even if it bounces, don’t you think this is where resistance will be? Which magically is right around now the 50-day moving average.
I hope this video helps, I want you just to remember to frame your expectations. Make sure that you’re framing your expectations on the chart, and if your reasonable expectations aren’t really consistent with what your desire is, the way you want your account to grow, then just don’t take the stock, it’s as simple as that.