Dead cat bounce on Day 3? Look at UPS. (February 02, 2017)
A couple days ago or maybe it was just yesterday, frankly I don’t remember, I was looking at UPS ( NYSE:UPS ). This is like a huge pukefest here. Big, massive sell-off after a couple of really nasty days and I was talking about how you want to wait for signs that all of the selling is going to be done before you buy. I was actually explaining to my wife, who is not a trader, how the idea is if there is some kind of bad news or some catalyst that everybody wants to get out of the stock there is just this sell, sell, sell; all this supply hits the market. Meanwhile the bids on the stock just keep getting pulled away. Because why buy the stock at 109.00 when there is so much of it? You say, “Well maybe I will just bid 107.00 and I will get filled.”
You are a big fund, you are trying to get out of the stock. You keep having to lower your price. Well at some point all of that supply is done. That was yesterday on the first. In fact I remember mentioning this, that the stock fell and it started to drift higher. But how much real upside is there? It wasn’t actually a convincing bounce. And so now what are we doing? We will look back at the daily chart again and this is still down today; not a big deal. You candlestick aficionados, you can see the flaws in this, but it is kind of an inside day. Where the intraday high is lower than the prior. And the intraday low is higher than the prior. It would be better if this was up in this area here (I am not going to turn this into a candlestick lesson). The bottom line is this: This gave you an indication that this selling pressure is done.
So here is a trade, and I am using this stock as an example but you can apply this tactic to any of these big sell-offs. You can probably apply it to Amazon ( NASDAQ:AMZN ) in a day or two. But go back and look at the chart here. Yesterday we got this, no follow through so this is the high right here, we will call it 105.70. I am going to set my alert here at 105.70, this will have a question mark on it. Buy. That is all I need. I know what I am looking at when I see this. I am just going to set this for a day. If I don’t catch in on the first one it is probably not going to matter. If the stock gets up to a new high retaliative to where it was today, in other words above 105.70, it could run for a point or two just on a simple snapback. Now, a point or two isn’t enough really to get my attention, it is a fairly low reward, but I am using this to explain this type of a pattern to you. You want to wait for signs that the selling pressure is done and THEN you enter the stock on a new high relative to the prior days high. That is a buy signal, and it is always better when the stock is stretched FURTHER than just 10 percent or so.