Have you been in Masimo (MASI)? Here’s how you use volume and price action to trade it the right way. (February 25, 2017)

Free Chart


Lets look at Masimo ( NASDAQ:MASI ) here. We featured this for a while as it has moved up; there have been several buy points on this stock. First of all, from a fundamental standpoint the earnings and sales growth are pretty good. Actually the earnings are awesome. Revenue growth about 10-11 percent per quarter, which isn’t too shabby either. The bottom line is, earnings are kind of exploding here, and so you like the fundamentals of the company. How do you trade the stock? The first time you really look for something out of this stock is a breakout above this level. Now, this is all on lower volume, so if you happen to be looking at this stock, you are looking for an entry, fine. You maybe start taking some stock, just know that volume is not confirming.

Now, lets get out of this, zoom in a little bit more, and here is the deal: On this day, which corresponds to that day, on this day we got huge volume. The stock hit a new high on this chart. The next day it gapped up, but the volume and the stock was lower than the prior day. So if you are looking at this you might think okay this was a fake out. Well first lets look at this big day. This is institutional accumulation. When ever you see a big volume spike like this, like over twice the average daily volume. That gives you the sense that there is institutional buying. Now, they are not going to buy it all in one day. They don’t do that, you and I might do that, even then it is not a good idea to do that, but institutions have to buy over time, so they push the stock up.

Then the next day the stock moves up and then closes down. Volume was lower than the day before, but look at the price. The price still hung in there okay and continued to hold. So up until this time here this volume and this little move here, that was the tell that this is under institutional accumulation. It did not pull back. So you have to have a multi-day view of this, not every trade is a day trade. So lets say you are long the stock here, you just hold the stock, you have to be patient. You have to be patient. You HAVE to be patient money. The fundamentals are good here. Then the stock breaks out above this level. Lets look at this day, heavier than average volume, another sign of institutional accumulation.

The stock drifts up a little bit, not a lot, but what happens? First of all, this line of support is long gone. Nobody cares about that anymore. Now we have got a new one. Then we get a breakout here, heavier than average volume. You see, we are getting these little stair steps; it is not super volatile, it is just in a nice gentle uptrend. Look at the 50-day moving average. Look at the 20-day moving average. It doesn’t really pull back it just drifts sideways long enough for the stock to tag or come close to tagging the 20-day moving average. So then we get another buy signal here. And then now here, essentially right here, on the 15th, we get another buy signal.

Now this is different than the others because you can see the stock drifting up and sideways, up and sideways, up just a little two day pullback and now we are starting to accelerate at a higher rate; this is like a launching ramp here. So the stock takes off on this massive volume here and it just continues to walk along the upper band. So what happens to volume? By the way, you think this is institutional accumulation? Absolutely it is. This is not a short squeeze, there are not that many shares that are short. Volume is still pretty heavy. Now, maybe it is the same firm. Maybe it is a couple that are taking a position in this stock. But this is giving you a buy signal. It is giving you go, lets go, go, go. The stock is moving higher. Great fundamentals. What could be wrong with that? Look at the rate of change; I have done this over 10 days so it is a pretty short period indicator. This is how much the stock is moving up today relative to the average over the last 10 days. That is a real simple way of looking at it. So this is moving up to new highs.

Now, lets look at the weekly chart. The weekly chart shows you that this stock really, really takes off. You look at the moving average convergence/divergence, it is a trend and momentum indicator, well above the midline, it is totally screaming. So is this a buy? No. Sorry to tell you that. The way I look at this is, you kind of missed the boat. The time to be taking these kinds of stocks is during these calm periods when there is a little indication, a volume spike, the stock hits a new high, and then it doesn’t pull back. Then it drifts sideways and essentially the same thing happens, and it doesn’t pull back. So it tells you that when you look at the price action, relative to the volume, it gives you a sense of whether shares are being taken off the market.

And think about that. Think about what I am saying. If an institution buys the stock they are not selling it right away, they don’t employ day traders. If they buy the stock the stock is effectively wall papered. It is off the market, which means that there is less stock available for sale. So as they buy more the effective float, the effective number of shares that are freely trading is decreased, which means that anybody who wants to buy the stock is competing with people who see the move. They are competing with more and more traders with more and more demand and they are competing to GET a diminishing supply of the stock. So that is why you see this stock do what it is doing.

Well finally, I can’t think of a better way to say it, the bears finally said, “Screw it, I have got to buy some stock.” So everybody is piling into this stock. You see the big move here and then since that time volume is on the decline. Here is the thing: The stock breaks to 80.00 on massive volume. It moves up almost $2.00 on about half the volume the prior day. And then then the next day, moves up, even less volume, a little bit more volume but nothing like it was here on the 15th, and then it continues to move up on lower volume. Okay, Oh, that is the end of the rainbow here, we are out of here. Oh! We are moving up again on this light volume. The point for saying this is, this stock has moved up another 10 percent on declining volume. After the stock hit 80.00 and then we see lower volume. This stock has moved up 10 percent. So just looking at this move here and saying, “Okay, I have got to get out of the stock. It has been a heck of a move. Thank you very much.” You are missing out on 10 percent.

So, what do we do? I will tell you what you do. First of all, you are just chasing if you are buying Masimo ( NASDAQ:MASI ). But you can apply this, what I am going to tell you, to any stock that you are in that is starting to go parabolic. First of all, you look at the rate of change. You put it into a real tight time frame, even do it to 5-days if you want. Okay, rate of change over the last 5-days, now we are seeing this actually dip down. And so you can see that over the last few days the stock is still advancing but not as fast as it was before. So that gives you a little sense of what is happening. Now, what about an exit? I want to stay long this stock as long as I can. This thing could go to $100.00, I don’t want to sell it at 88.53 So what we do is, the 200-day moving average (I have already done this in advance so I know what works) we take the 8-period moving average, so you know which one that is, here, that is what it is. We take the 8-period moving average.

Now if we use that, that is a pretty good reference for the trend. The problem is, the stock can pullback 4-4.5 percent before you even get tested here. So lets do this instead, this is simple. Lets go exponential. That is a little bit better, but we are still almost 4 percent, so we can even go tighter than that. Lets go about there, 6-day moving average. So you have got an exponential 6-period moving average. You wouldn’t use this when the stock is trading sideways, you would get stopped out every day. But when the stock is moving higher what you are doing is, you want to really snug up your trailing stop on this. After the stock has taken off it has not even come close to hitting this 6-period exponential moving average. So if you use something like this what are you giving the stock room to do? You are giving it room to move below Friday’s intraday low, Thursday’s intraday low. And if it moves below Wednesday’s intraday low, time for Elvis to leave the building. But from where it is right now, down to this level, it is 3.5 percent. So you take your stop, maybe you put it just a little bit below 85.00, so you have got about a 4 percent stop on this stock and you able to enjoy this run up as long as it goes.

So I look at this stock. There is no way I could buy it, it has gotten away. It is the one that got away, it is a missed opportunity. Too bad, so sad, move on. But if you are already long the stock then just use a trailing stop like this because you don’t know how high this stock is going to go. If I do it like this, it looks like it is $100.00 easy, not a problem in this move. They don’t report earnings until May. This is a medical devise company. They make patient monitoring systems, there are a few patients out there, we are all getting old. So check this out. Try to use this to protect yourself on your positions that are really, really profitable. And if they are not really profitable maybe we need to find you some new positions.