When the earnings report is stellar, and guidance is good, what do you do? Well, of course,…you sell! Check out this video about Splunk (SPLK). (December 01, 2016)
SPLK
In this video we are going to look at Splunk ( NASDAQ:SPLK ). Up until a few trading days ago this stock had been in sideways consolidation. You can see the kind of run it had. It was a pretty substantial run here, over double, and then this thing was trending sideways. At this time, seriously, there is really nothing for you to do. A lot of times what happens with traders, I see it all the time in the forum, there is really nothing going on during a particular market day (listen to me, because I am giving you pearls), but the last several days have actually been really strong; big moves higher and all that. And so then what happens is, when the market cools off, as it always does, then it is amazing the kind of activity you see.
People are buying stuff that would have been nice if they had bought 2, 3, 4,5, 6, 7, 8 days ago. But suddenly it is like now you are interested in buying stock. You are interested in trading and you can’t believe, because you are using your discipline in setting stops, you can’t believe how many stocks you are being stopped out of. “If only I had bought yesterday.” Or, “If only I had bought the day before, then I wouldn’t be stopped out, I would be making money.” Well guys, and ladies, think about this for a minute. What is happening is, you are buying from the traders who have bought before you. And because of the big run the stocks have made they’re taking profits. So you are actually being a philanthropist, which is very nice of you to do that, and I am sure traders that need to get out of stocks do appreciate it, but if you are going to do that give your money to a pet shelter or something like that, it will be put to better use.
Stay away from the market when it is really, really choppy, as it has been today and yesterday. Stay away from the market after it has been moving a lot and is now kind of choppy. What it is telling you is, the big move is over and now there is just a lot of jockeying for position. Traders wanting to get cash, late comers, hopefully not like you, but late comers coming in to buy stock can take savvy traders out of their stock. DON’T BE THAT GUY. So with that said, lets look here. Splunk ( NASDAQ:SPLK ), there is literally nothing to do, and this is why I was talking about that. There is nothing to do during these last couple of months of trading. The stock has been trading in a pretty tight range. Not enough of a range to even buy at support, sell at resistance, that is not worth your while; you are going to give away your money buying and selling wrong.
There is nothing to do here for a few months, literally nothing. You know what you do? Trade something else. But then on Tuesday, after the market closed, the company reports earnings, strong revenue growth and the stock gaps up in the morning, Wednesday morning. It gaps up above the upper Bollinger Band, right up close to the level of resistance here. The stock had opened at 62.85, right? It traded as high as 62.90. Yesterday then, the stock traded as high as 62.88, basically 62.90. So this stock gapped up and traded right up to this prior level and then sold off. We are looking at the 15-minute chart and what my bet is, is that the stock traded up to that resistance level right in the morning of 11/30. So we are going to scroll up here and see what happened. There it was, 15-minute chart right when the stock opened up and there was a decent short interest, not really high, 10 percent of the float was short. The stock gaps up, trades up just a little bit more, and then starts selling off. That tells you that there is MASSIVE distribution going on.
This is what we are seeing: We see the big gap up, right up to this level, volume is high, the stock starts to trend down. So even though the stock closed UP on the day, remember, they reported earnings here and then the stock gapped up, even though the stock actually closed higher, slightly, “Oh, a half a percent.” If you are just looking at a line chart you think this is pretty good. But you can see what has happened here, this chart tells you so much; it tells you, you don’t want to be long this stock because nobody else does either. That was yesterday. The stock is still hanging in right around 57.00. Your signal is clear, institutional selling, despite the numbers and upward guidance. It the institutions are selling, particularly after the stock has generally just traded sideways for half a year, you don’t want to be long the stock. So what happens today? Boom! The stock actually gapped up a little bit, and this will suck you in.
Look at some of the dry shippers, you will see it every morning. The stock gapped up a little bit, not very much, sucks you in because you think, “Oh, okay now we are going to move back up here. Because golly gee their earnings were REALLY good.” And then the stock starts trading down again. You can see what happened: Strong earnings here. Everybody that doesn’t really think that much about what they are really doing buys here and they don’t sell. And then gradually there is more selling and more selling, until what? Until now we are down to test this support level. I don’t think so. The reason I am saying that is, this is clear back in June, there has been a lot of trading that has gone on since then, but there is a lot of pain in this chart. Anybody who bought during this time frame is now losing money. You want to sell this stock. I am not really sure that I would want to short it in an environment like this because there is kind of an underlying bid to the market, though we are definitely getting some sell-off in tech.
I am not really sure that I would want to short this, but if you DO definitely be able to babysit it. Because again, they had strong numbers, no problem there. The stock is down quite a bit, no problem there. But it has broken support. I would look for more downside. I could see this certainly moving into the mid 40s or so. But my main message to you is this: This is not a buying opportunity. Learn to read what the institutions are doing around earnings reports. When you see GREAT news, the stock gaps up and then it reverses, that tells you that this is actually a good opportunity to sell, if you can get there early. And the one thing that I would suggest here is, if you do short this stock, and like I said, I can’t just pound the table and say short it, but I will say the short will probably work. Just keep a buy stop on that, a trailing stop, say 3 percent above where you are shorting the stock. That way it will keep you from getting in trouble if the stock does reverse.
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