Spinning The Inverted Cup
Just as the market tells me when
to applaud go news, the market also tells me when to fade spin. On Thursday,
Retek said it anticipates Q1 results to meet the high end of analyst estimates.
Analysts are projecting revenues at
the provider of software to the retail industry in the range of $34 to $36
million and a loss, excluding non-cash charges, of four to six cents per share
in the first quarter.Â
Shares in Retek
(
RETK |
Quote |
Chart |
News |
PowerRating) headed
lower and appear to be forming an inverted cup-with-handle. In a classic
upside-down cup-with-handle, you go short as soon as the stock breaks below the
low of the handle (see Point a in the
following chart), setting your stop just above the high of handle (see Point
b) while adjusting your position size to limit the theoretical risk
to 2% of total account equity. In other words, by the time a stock hits your
stop, the maximum loss would represent a 2% drawdown on the total value of your account from the time
you entered the trade. Some traders hold that exposure to 1% of total account
value.
All stocks, of course, are risky. On
any new trade, be sure to limit your position size and set a protective price
stop where you will sell your buy or cover your short to protect yourself
against severe losses. For an introduction to combining price stops with
position sizing, see my lesson,
Risky Business.