Your Stop Gets Hit, But The Stock Recovers. What Do You Do?
Ever wonder what to do with a stock
you just bought on a multi-week base breakout that hits your stop-loss the same
day you bought it? As unnerving as it is, you sell it of course. But what do you
do if the stock holds and breaks out again a couple days later? As unnerving as that
is, you buy it back.
Just when you’re in your zone–just
when you’re operating on all cylinders–something like this will strike. If you
stay focused, however, you will be able to do this as effortlessly as anything
else your experiences in the market teach you. Yes, a situation like this is
quite rare, but there is no way you should ever just walk away because it’s too
painful to deal with. It may just be one of the big-winning stocks you’re
looking for.
Active Software
(
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PowerRating) was one such stock
that caught me flat-footed in this situation. But instead of letting the stock
control me, I controlled it.
The stock was set up perfectly in a
seven-week, cup-with-handle base. The OTC market was on fire. Other stocks in
leading industry groups were breaking out of basing patterns left and right. And
most of my other stocks were breaking out, following through to higher levels,
and I was making money very rapidly. Sound like a recipe for complacent greed?
Only if you’re not careful. Only if you approach the market without any sense of
humility.
After swinging up off its base lows on
heavy volume to complete the cup portion of its basing pattern in early February
(a), the writing was on the wall. The stock was prepping itself for a healthy
breakout. But there was the case for the handle part of the base first. And
there it was. The stock pulled back on low volume on Feb. 18, 22, and 23 (b),
then sprang to life on Feb. 24 on heavy volume (c). This baby was being heavily
accumulated and I was ready to strike!
With a pivot-point, or buy price, now
set at the high of the cup’s right side (beginning of the handle) at 99 1/2, all
I had to do was wait for it to cross that level, preferably on increasing volume
during the day, and buy it. Easy enough. I was all over it, buying 12,000 shares
as it approached the 99 1/2 level during the day and crossed strongly to a high
of 102 5/8 (d).
Okay. Feels good. This stock blasted
right through its pivot price. Wow, this is great! Just as I sat back to read
the paper, thinking all I had to do now was let the stock go and watch the
profits roll in, the stock abruptly stopped going up. But I’ve seen this before.
After most stocks break out, they have to take a rest somewhere. But that was it.
By the end of the day I was bailing out of my position as it ticked due south
from a high of 102 5/8 all the way back down to 90.
The situation went down something like
this: What the…? Now 94 bid.
Pick up the phone, call my trader, “Sell 6,000, ASWX, market.”
Done…somewhat lower. But still not holding. Aaaaaargh! Pick up the phone, call
my trader, “Sell 6,000 shares at the market, go, just hit the
bids!” A minute goes by and the trader calls back, “Greg, man,
nobody’s home on this thing…no buyers anywhere.” Bidding 90. The stock
finally holds, I get filled at the low; ten minutes later the stock lifts and
closes for a small gain on the day–up 5 3/4 points from where I sold my last
lot of 6,000 (d).
That was fun…not! But I had no
choice. Although my final exit point ended up being the low of the day, I didn’t
know that. All I know is the stock hit my predetermined stop-loss (actually
moved right though it) and that’s all that mattered.
Okay, day’s over. Move on. The stock
hangs in there for another day, closing down marginally the following day. All
right, let’s reset our pivot-price to 102 5/8–the intra-day high on the day
I got “whipsawed.” Voila! After holding within its handle for a day,
the stock breaks out again. And I buy it back crossing 102 5/8 (e).
As I’m writing this piece on Mar. 13,
Active Software was the only stock in my portfolio that not only resisted the
Nasdaq Composite’s 141-point decline, it actually rallied 25 points from its
down opening to a new all-time high. Now there’s a situation I can live with.
| “Through continuous post-analysis of all your mistakes…you’ll find that the light at the end of the tunnel really is an opening…” |
Actually, as I watched the stock do a
180 the first day I bought it, I thought about what may have moved it so
dramatically. Perhaps the stock fell into the hands of several day-traders that
broke it out before it was really ready? I don’t know. But it was very unusual.
Nonetheless, if this was the case, and the stock actually held tight
within its basing pattern, then it all made sense to me.Â
And if I understand
what may have happened, it makes it all the more easier to step right back up to
the plate.
Should you be able to do this with
little experience in the market? Let’s just say, if you do, then you’re light
years ahead of where I was when I began trading stocks many years ago. It
literally took me years to get the nerve to step right back up to the plate
after whiffing on three straight fast balls like this. Through continuous
post-analysis of all of your mistakes, though, you’ll find that the light at the
end of the tunnel really is an opening and not the headlights of an
oncoming train.
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