Check out the 3-day rule applied to Applied Materials (AMAT) (October 04, 2017)


I want to look at Applied Materials (NASDAQ:AMAT ) here. This is why: I have got a really, really good example of the 3-day rule here. First l we will look at this: One of the things you astute folks might have realized is this is not a current chart. This goes back only to September 25th, so we are missing a few days here, quite a few days.

I want to show you how to time your buys. First of all, as I look at this stock here, frankly, let’s just keep it real; this isn’t a stock that I would be looking at buying right now. Sure, it is generally in an uptrend. If I am trading this kind of pattern I would like to see it pull back even a little bit more, closer to this 30-day this VWAP average, something like that, maybe even the 50. So I would be getting an early jump on this. Think about it, if you are running track you kind of get a little bit early jump out of the blocks, just a little bit to get you going early. That is what you are really looking for here.

And then what you would really be looking to do is take the next break out here above, say 48.00, something like that. Then what you are doing is, you are trading this flat triangle. Right now when you get to here, now you have got a line that you can draw, now you have got a line that you can draw here. That is confirmed by this here. So you have got your triangle down here. Now you have got the triangle here, and you are looking for a breakout. You take a little bit of stock right now if you are looking at this, and then take more on 48.00.

Here is what happens a lot of times: Retail traders, the ones that aren’t really making this trade, you are looking at this and you are saying, “Oh man! What Dan was just telling me, I couldn’t do it; I was waiting for a lower price but I can’t get it. Now the stock has already broke out here so I am sure not going to buy it because the stock is up over 6 percent from where it closed the prior day, so I can’t do that. You know what? Maybe I will get a pullback again.”

And then this happens, now you are looking at it and you are seeing higher volume, thinking, “Well, for crying out loud, I sure can’t buy it now. Now it is up over 10 percent from where it was when I was first thinking about buying. That is kind of a dumb trade, can’t do that. Maybe we will look for a pullback.”

Finally, the following day, we get another high volume day. I wouldn’t make too much of the fact that this is down slightly from the prior day’s screaming volume, we got three big days right in a row. So now you are looking at this and suddenly at $52.00, which is where this thing was. At $52.00 you are not looking at this as a $52.00 stock. You are looking at this as a $46.00 that you could have bought. And now, 13,14 percent later, you wish you could get credit for it. Because you did see it, you just didn’t buy it. You see all this volume and you are thinking, “To the moon, it is definitely going to go higher.” So you decide you are going to buy tomorrow. It was up a little bit and now here we are these days later.

My point is, that this is almost like a classic 3-day move. The real smart money, the powerful money, makes the move on the first day, which is what pushes the stock there. The not so smart money but not that dumb money sees the move and they buy. When you and I might have been looking at it saying, “No, it has gone too much, I will wait.” Other money looks at this and says, “I think I know what is happening. I want to buy this stock.” And then finally, the retail traders are in on this third day. The big money bought down here, which means they are buying up here.

And then finally the retail money buys; well they only have so much. So the demand for this stock that has moved up so much, as it moves up initially there is big demand. You can see it on the big volume bars, that is all buying activity. And then at some point the demand peals off because the stock is up too high relative to where it was a week ago. At that point you start getting profit-taking coming in.

What I am suggesting is, when you are making this type of trade, I talk about this a lot, over behind the curtain as I will say, is you take these entries and you can make them low-risk by simply getting as close as you can to a viable support level, which here would be the 50-day moving average. And then you are buying somewhere around here. You keep a fairly tight stop so that if the stock were to reverse you are just taking this little part of the move as opposed to the whole thing. Then as the stock starts moving up, even into the first day, even into the second one, you are adding to your position because at the time you can start bumping your stop up on the existing position a little bit more. So you have got a lower cost basis, but you don’t have a higher risk level.

I could go on and on about this, but I am not going to. Try to use this type of technique in getting a head start on a stock and then buy more of it when it breaks out. But finally, don’t ever lose track of the count. Don’t ever lose track of the count. If a stock is up two days in a row be really leery of the third day. And if it is up three days in a row, like these big wide-ranging days, absolutely the fourth day is suspect.

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