RTI International (RTI) – May 31, 2007
How many times have we seen an uptrending stock get crushed on a piece of fundamental news like disappointing earnings, a failed product, or a similar catalyst that reflects on the underlying company rather than just the price action of a stock? This happens all the time, and the result is often a lobster trap for unsuspecting traders. They get in, but can’t get out.A recent example of this is RTI International (RTI).
The company announced disappointing earnings in early May after being a stellar performer since mid-2006. The 50-day moving average had occasionally marked the level at which pullbacks tended to attract dip buyers. It happened in January, and again in March. But the 15% drop on May 1st caught a lot of traders off-guard, as evidenced by the heavy volume. Since that time, the stock has been trading sideways, with a sizeable bounce just yesterday.
But what do you do with this stock now? My approach is to simply do nothing. I value the time element of trading. When you buy a stock, you buy risk. Why own risk any longer than necessary? Instead, just wait for the stock to finish the sideways churning period before acting. If it falls below support, sell it. And if it moves above resistance, then buy it. But either way, you are typically better off by waiting for the stock to break out of the trading range. The profit that you might miss out on by waiting is more than outweighed by the risk that you avoid by committing your funds early.
For a more detailed explanation of the concept of support and resistance on this chart, click here.
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