Homer Simpson Trade on Optoelectronics (AAOI) tomorrow. “Aaaaah…crap!!” (August 03, 2017)
We are going after hours with Applied Optoelectronics ( NASDAQ:AAOI ). This has been one of my favorite stocks while it was moving up. It is kind of interesting, nice little patterns here; the company reports earnings after the bell and the stock absolutely gets crushed. Not just with an ugly stick but one with a bunch of rusty nails sticking out the top end. You can see what happened after hours. They just preannounced not too long ago. They report earnings and their guidance for Q3 really stunk up the joint. Forward guidance is everything, this is the total Janet Jackson market (Sorry, that is probably before a lot of your time. What have you done for me lately?), everybody is looking forward, this is already baked in.
So what happened? The stock traded out of this volatility squeeze here, through $70.00. And then, “Oh, the company preannounces it is all good, so we will buy the stock, hold over earnings. Hopefully they report great numbers, give good guidance. And then we will sell to all the knuckleheads at 120.00, who didn’t buy it early.” That didn’t happen. What has happened instead is, the stock has come back down, basically to the breakout level. It is below the 50 but way above the 200-day moving average. This is what I call a rubber band bounce. It is a stretched rubber band, down over 30 percent. A stock that is down 30 percent and it is not a biotech stock, that is a stock that I might be interested in buying.
Here is the setup for tomorrow. This is a chart trade now, I don’t really look at fundamentals, growth, anything else. I haven’t read any articles on this, I will do that over the next couple days. This is what I am looking at: A 30 percent decline, we are going to get some kind of snapback. For one thing, and this is really important, 60 percent of the float was short. What do you think a lot of those folks that are short this stock are going to be doing? I know what I would be doing if I was short the stock, I would be buying it tomorrow morning. At the same time, those folks who bought, and they were expecting higher prices, they do the same thing that they do all the time, they sell at the wrong time, because they buy at the wrong time. They will be selling tomorrow morning.
So you will get a big flush, a big washout of sellers who are eager to get out of the stock before it goes even lower, which, when you think about it doesn’t really make logical sense, but that is what people do. You have a big rush of sellers right at the open. At the same time you have got a big rush of buyers in short covering. They are going to soak up all that supply. What do you think is going to happen after that? Is the stock going to continue to go lower? I don’t think so. I suspect it will rebound a little bit. Am I bullish on AAOI ( NASDAQ:AAOI ) anymore? No! I am just wanting to see if the thing is just trading above 70.00. Maybe we can get 5, 6, 7 points out of it. That is just the way this market is these days.
That is your trade for AAOI ( NASDAQ:AAOI ). I look at 70.00 as kind of a line in the sand here. In fact I am going to set an alert for me. By the way, I am already long the stock. I am not taking a bath, I bought it after hours, for this trade. We will go 5-minutes later for a week, lets do 70.10. If it is above 70.10 tomorrow I may even add more. But what I am looking for here is $5.00 or $6.00, something like that. If I get that, then I am out of here. I hope that helps. We will probably revisit this in tomorrows Chart of the Day as well.