Looking for a pattern trade? Try these three stocks — $SNAP $TWTR $GRUB (February 12, 2018)


Today was a pretty volatile market, not a lot of consistency in things. Although, depending on how you look at it everything, when you think about it, seems to be rebounding at the same time or peaking at the same time. That is just the way the market is right now, where it seems like there are nothing but “fat fingers”, sell everything or buy everything.

I want to look at some specific stocks that are showing the same exact thing. Basically, these are lessons that you can apply to just about any stock that has really, really strong earnings or some kind of guidance that pushes the stock up. We are going to look at GrubHub ( NYSE: GRUB ), Snap Twit ( NYSE: SNAP ), as I call it, and Twitter ( NYSE: TWTR ) because they all kind of look the same way.

Twitter ( NYSE: TWTR ) reported earnings and here is the lesson here: Sell a stock that gaps up 25 percent, literally 25 percent. It gets wild first thing in the morning because of the gyrations. But when you really look at this, how could you expect a stock that gapped up this high to continue running? We put a spread on this over at Option Market Mentor where we sold calls, not bought them, but we sold them here. Then we covered our position up with a higher strike call that we bought, just basically insurance. That has turned out to be one of the easier trades that I have done just because it was so far out of whack that you just knew that it had to go the other way.

Similarly Snapchat ( NYSE: SNAP ), it gapped up and then finally peaked. But here is the thing: If you look at this stock now when it first gapped up, up over 20 percent, right? So you look at Twitter ( NYSE: TWTR ), up 25 percent and then it promptly reversed. Snapchat ( NYSE: SNAP ) didn’t do that. Here is the 5-minute chart; it gapped up here and it kept moving, which is why you don’t reflexively sell a stock that gapped up at the OPEN. Just like you don’t reflexively BUY a stock that gaps down at the open. You want to wait and see which way the market is going to take you.

But here, with Snapchat ( NYSE: SNAP ), it is actually one of those things where as long as you are not in the trade and losing money you see this stock gap up and it keeps moving and it keeps going and going and going. And you think, “Alright, this is good. Not now because I wish I was long but I am not. I couldn’t chase this stock, it was too much. But I know this thing isn’t going up too much higher.” So then it peaks here on this particular day and now, here, it is up how much? Almost 50 percent higher. Then the next day it trades at the same level and promptly starts rolling over.

So what do you do? You trade this to the short side and your stop is right above the prior day’s intraday high. That caps your losses (I guess this should be green), this would be a buy order, a limit buy to close order here above the prior day’s intraday high. That is how you would trade that. By the way, the same type way you would have traded Twitter ( NYSE: TWTR ) only this time because the stock started drifting lower so you short the stock then but you still have your buy stop ABOVE the maximum power of the bulls. That is really what we are looking for, what is the maximum power of the bulls on this power move? Well, here on Twitter ( NYSE: TWTR ) it was $35.00. On Snapchat ( NYSE: SNAP ) 21.22 was the high here. So you use those as your reference points.

Now, how about GrubHub ( NYSE: GRUB )? It kind of gives you a little bit of both here. A gap up, a pretty substantial gap, right? Over 20 percent. Then it kept moving higher but it closed near the middle of the range, a little bit on the bottom. So you would have to, if you are going to keep this consistent and we will, you are going to have to use this 95 level here as your reference for a stop. So if you were shorting this the next day you have got a risk of about 5 maybe 6 percent. So you can short this stock and then hopefully make some pretty decent money. I look at this now, this is still going lower. Maybe not a lot lower but after the kind of juice that this has had to push it up here I just can’t see it sticking around at these levels.

The point is on these you always have to pick a point of the maximum power of the bulls. And that is, again, the highest price here after a gap. Sometimes it will come really soon ( NYSE: TWTR ). Sometimes it will come really late, like after the first day ( NYSE: SNAP ). And sometimes it will be right in the middle ( NYSE: GRUB ).

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