Do you buy or sell a stock that’s up more than 15% on the close?
Discussed in this article: Questcor Pharmaceuticals Inc. ( $QCOR )
I want to look at Questcor ( $QCOR Questcor Pharmaceuticals Inc ). An interesting day in the market; here’s the deal. The stock popped up huge, up to $50.00; opened, just barely got above that and fell like a stone on news that they were actually buying a drug from Novartis ( $NVS Novartis AG (ADR) ). Now typically, when news is released that a company is spending money on something that another company has, the stock typically goes down actually, don’t ask me why because then I’d have to explain it to you, and that tends to take longer than I want to do in this video.
The bottom line is, when the company pays out money for something, unless the market thinks it got a smoking hot deal, the stocks usually going to go down. Well here, apparently the market thinks that Questcor ( $QCOR Questcor Pharmaceuticals Inc ) got a smoking hot deal on this because it closed up about fifteen percent, but look how far below the opening print it closed. So this was a total sell the news event. You have to understand exactly what happened in this stock or in this company in order to understand what the trade is, and here’s the deal; Novartis ( $NVS Novartis AG (ADR) ) had a generic ingredient or the active ingredient of Questcor’s ( $QCOR Questcor Pharmaceuticals Inc ) lead drug. The specifics aren’t frankly, that important, you biotech snobs go ahead and thumb your nose at me, but the bottom line is, if you can read charts, then less is more when it comes to understanding biotech. The bottom line is they are buying the generic ingredient that Novartis ( $NVS Novartis AG (ADR) ) has, so it basically clears the way for their blockbuster drug to continue to make them blockbuster profits, right?
Okay, well so, fine. The stock sold off, is this a buying opportunity? Hey it’s up fifteen percent, so this little pullback gives us a great opportunity. I don’t think so, and the reason is pretty simple. What’s the catalyst going forward? See that’s the most important rule, the most important element of any trade is, everything I see is based on what the market already knows, or what it thinks it knows, or what it thinks it doesn’t know. So in order for us to get new prices, prices up or down, there’s got to be some thing that happens that the market doesn’t know about. Then what gives me the sense that maybe I know enough about it to, quote, predict a direction? Okay that happens, lets just say, very rarely, we like to fool ourselves with that a lot, but the bottom line is, typically we’re guessing. So let’s not guess here. The stock gapped way up, has come back down to this support level, I think frankly, that it’s got more to go on the downside. The reason I say that is pretty simple, the stock has just been drifting down pretty much all day and it kind of makes me feel like the only reason this stock closed at $42.00 is because the opening bell was followed by the closing bell.
So I would not want to be touching this stock right now. Also, keep something else in mind; for every share that was sold on the way down that share was bought by somebody else. So there’s a much higher average cost basis in this stock than you might think there is; which means that going forward, tomorrow, or the next day, or the day after that, there’s going to be a whole lot of supply of folks that regret having brought this stock; they’re going to want to be selling it, I just don’t want them to sell it to you. So stay away from this stock, frankly this trades done, it’s in the rear-view mirror. If you made money on it, great, if you didn’t, well move on to the next one.
Also, keep something else in mind and I’ll leave you with this; look at the short interest. Short interest was pretty high on this stock, so when the stock first pops up in the morning you might think, oh my gosh, we’ve got a short squeeze this thing’s going to the moon. Okay, that’s not a bad thought to have, but it shouldn’t be a conclusion, it should be a question. Is this stock going to the moon? Is it going to defy gravity because the short interest is so high? You look at a five-minute chart and you would have had the answer to that question during the first bar.
So when a stock gaps up and you think it’s moving, you think it’s going to move a lot higher, for whatever reason, a lot of times it would be, oh, short squeeze. If the stock is not telling you, if it’s not telling you the story that you want to hear, if it’s not doing the thing that you think it should be doing; you are wrong, the stock isn’t wrong, you are wrong. So if you had expectations of a short squeeze continuing to push the stock higher, again, that’s fine, that’s a reasonable thought, but when the chart is telling you otherwise, don’t stick with your theory that’s actually just been disproved by the stock. I hope this helps with trading at the open; also in helping you distinguish between a stock that should be bought versus sold, versus stayed away from when we’ve got a fifteen-point gain on the day.
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