When a stock is misbehaving, how do you handle it?
Discussed in this article: YRC Worldwide Inc. ( $YRCW )
I want to look at YRCW again here, YRC Worldwide ( NASDAQ:YRCW ) yesterday printed this, I guess I wouldn’t quite call it a tombstone doji, close enough I guess, but basically the reason I would say that is because it’s not like it’s just been a massive uptrend, this has just been coming out of a squeeze, but the stock ramped big-time on Friday. The deal is, they needed the union to agree to allow the company to refinance some debt, basically restructuring without taking anything away from the union, of course we know that the true component of socialism is that the unions never take the risk they only get the reward, we know this.
So anyway that was accomplished and so what happens? The stock comes up on Monday, but then it closed down close to the low of the day and that is something that you look at and say, “Okay well that’s like an intraday turnaround, advantage bulls here no problem. The stock gaps up, advantage bulls, oops all the way up until the time that the stock starts moving lower again, closes lower on the day relative to where it opened, advantage bears.” So the idea is this is not a stock that you want to be buying after this kind of move, maybe you’d want to short this stock, although I don’t remember exactly what I said yesterday, I make it a point not to go back and look, so that I don’t have a results oriented analysis to give the impression that I’m always right, because I’m not. But I can’t imagine saying, short this stock.
The only time I would ever want to consider shorting a stock with this kind of pattern, like this kind of intraday reversal pattern, would be if it was after a pretty steep uptrend, suddenly we get this kind of move intraday. After a big up trend we get a big huge volume spike and a big intraday reversal, that’s something that maybe you could consider shorting. But a stock that comes out of a volatility squeeze like this, there’s really no potential in it on the short side because you have to expect support to be somewhere around here, around $11.00 or so just because that’s where the stock broke out. So you wouldn’t really want to be doing that. But you would not really want to be buying this stock because at this intraday reversal, you’d expect it to not go higher.
So what happens when a stock does something that it’s quote, “not supposed to do,” that you wouldn’t expect it to do? Well, you need to alter your course and you need to say, “Okay well I thought the stock was going to go down, guess it’s not, so I think there’s a lot more buying interest than I thought there was.” So what do you do, by the way this is a third standard deviation out here, we’ve got the typical Bollinger Bands in the dark gray area and then outside of those are three standard deviations, which are supposed to contain just about all the price action. I would look at this and say, “Okay if this stock does trade above Monday’s intraday high, that’s 14.39, so we’re almost there now.” If the stock trades above that, another 40 cents then this stock is surprising a lot of people. There’s a lot more people going to be buying this stock, there’s going to be a lot more demand for the stock above 14.39.
Would I buy it now in anticipation of a breakout above 14.39? No, I wouldn’t because look at the volume, I mean today’s volume is definitely heavier than average, but not as heavy as the last two days. So buying activity is lower, even though the price is up 7 percent today, that’s pretty good after this kind of intraday turnaround yesterday. So what you’d want to do is wait for evidence that all these folks who sold are a little bit surprised, a little bit disappointed, then you will see more buying interest in this stock that will wind up pushing it much higher. Until then though, this is still a cautionary chart, one that you look at this Monday’s action and say, “All right that looks to me like it was the high here at 14.39, I’m not interested in playing just now.” Again, to clarify, if the stock clears 14.39, then the bulls are going to be running.