When a stock doesn’t do what it’s supposed to do…then go the other way! Look at Akamai (AKAM) (February 08, 2017)
Lets look at Akamai ( NASDAQ:AKAM ). This is an ugly chart. Yesterday it wasn’t so ugly; this was poised to breakout. In fact, when they reported earnings after hours it was 72.00, 72.50, something like that. But then ultimately it fell back into this general area. I know because I was watching it. Here is the thing: You never know what is going to happen after hours, which is why I think if you want to trade after hours, I don’t even really feel like there is any skill involved. It is not something that you can, like, get good at. And I know some of you will disagree because you think you are really good at it. And that is fine, good for you. But the hard, naked, ugly truth is, that you don’t really know why a stock is moving after hours. Is it because some hedge fund is trying to move it around, trying to break it out above resistance so they can dump shares? Or is it because they are accumulating stock? Or maybe it is just somebody that is buying a small amount of shares, and then you go to join them, and then suddenly the bid drops out. It is extremely unpredictable.
But one thing that you can do is keep in mind what the trading range is. Where is the range on this stock? And so, right now if you just look at, this is the range, and this is the range, that is it. So then it is trading still in the range after hours, but then this morning the stock gapped down here. Now, it is often the wrong thing to do, to sell a stock that gaps down 6-7 percent from the prior close. A lot of times you want to buy that stock. We can see how Akamai ( NASDAQ:AKAM ) has fallen down below established support, this is established support here, it has fallen back down. And then ultimately rallied. So to just sell reflexively at the open, frankly, is not the best strategy. Because of the rubber band effect a lot of times you are going to get a snapback, just as a function of stocks being bought and sold.
And by the way, earnings were really not that bad, but obviously the market was expecting more. You can’t sit there and look at a stock that is down 10 percent and say, “Well, the market is wrong, because earnings were actually pretty good.” If you want to be the guy that steps in front of the market and buys into this, then be my guest. Go ahead and trade after hours too, if that works for you. But what you want to do is, understand that TYPICALLY a stock that gaps down from here to here is going to snapback. That is what you are waiting for. That is what you are looking for. You may choose to trade that, though the cluster here, $67.00 or so, the stock opens up here and it just can’t run that far before it would ultimately run into this resistance. So it wouldn’t be a good trade anyway.
But the point is, you don’t want to be SELLING right at the open because of the risk of a snapback. I am emphasizing this and this is why: Because if a stock does not do what typically a stock should do in this situation, that is really meaningful and you can trade on that. So, this is how the stock looked on a 5-minute chart. This is how the stock looked at the end of the day yesterday. And you can see where I have got the ranges here. And then the following day the stock gaps down here, this is this morning, the stock gaps down here and does not move higher. So while it is supposed to, I use that term loosely, supposed to rally, it didn’t. So what you can actually be doing is, you can be shorting a stock like this as long as you understand the dynamics and you keep a buy stop right up there.
The whole idea for shorting is, okay the stock gapped down, you expected it to snapback but it didn’t. And so the only way I would not want to be short this stock is if the stock ultimately does start moving above the opening print. That tells me that actually there is demand for the stock, I don’t want to be long. So you go ahead and short this stock with a buy stop just above this opening rotation high, the high that is set in the first minute or two or three of trading. And then you can ride this all the way down. You see, shorting the stock here, it falls down another 5 maybe 6 percent, but that would be like if you bottom ticked it. But you can easily get 3, 4, 5 percent out of the short just by trading what was supposed to happen but didn’t. And so you are shorting the stock, you are also recognizing that after the first hour, typically by 10:30 anyway, any kind of morning move is done. That doesn’t mean that the stock is going to reverse at that point, but it does typically reflect a pause in whatever trend there was. So here this thing didn’t even get to 10:30, just 9 o’clock and then it stabilized for the whole rest of the day.
Now here is the point: What is your trade now on Akamai ( NASDAQ:AKAM )? I don’t really think there is one. Right now the stock is range-bound. The real trade was on the short side first thing in the morning. Again, based on the stock not doing what it was supposed to be doing. For now, what you want to do is just avoid the stock. Don’t sit here and try to be a hero and own the stock. This is going to trade sideways for the foreseeable future. If you are interested in Chinese Internet do something like Baidu ( NASDAQ:BIDU ), you are going to get a better return on your money.