One recurrent theme among our Stock of the Week selections over the months has been that
short-term traders and active investors often need to be both patient and persistent when it
comes to waiting for stocks to pullback to significantly oversold levels before taking long
positions.
An example of this comes in the form of the ratings upgrade and pullback in shares of
Vivus Inc. (NASDAQ: VVUS) late in the second half of March. Shares of VVUS had begun pulling
back near the end of February, as traders took profits in the wake of the stock’s spike
higher. This profit-taking led eventually to the stock earning a “consider buying” rating of
8.
For aggressive traders, this may have been enough to make a move on Vivus Inc. However, in
closing lower for the third day out of the previous four, shares of VVUS earned a further
upgrade to 9 out of 10, increasing the odds that the stock would reverse and move higher in
the short-term. And for more conservative short-term traders and active investors, these
ratings of 9 or even 10 out of 10 were the upgrades, and potential opportunities, worth waiting
for.
And here is where the patience and persistence come in. Traders using intraday entries to
take positions in stocks the day after they earn top ratings would have struggled to
immediately buy into VVUS. With the stock only pulling back by two and a half percent the
following session, only the most aggressive traders using minimal intraday entry levels of
less than 2.5% would been able to take advantage of the stock’s follow-through to the
downside.
However with the stock again earning “consider buying” ratings of 9 out of 9 the next day, traders would
have another opportunity to take a long position in VVUS – if, this time, the stock pulled
back more significantly on an intraday basis the following day.
This time, the follow-through to the downside was much more powerful, as sellers took VVUS
lower by as much as four and a quarter percent intraday. This meant that a wider group of traders –
essentially anyone using an intraday entry level of 4% or less – were able to pick up shares
of VVUS and, in using intraday weakness, were doing so at a major discount to previous
levels.
Those who bought during the VVUS pullback did not have to wait too long before it was time
to lock in gains. Within three days, shares of VVUS were closing above their 5-day moving
average, rallying into strength on the final trading day of the week. In closing above its 5-day moving average on Friday, the stock had gains 3-4% for traders who bought during the lower levels of the pullback. Traders who held out
for the 2-period RSI exit saw even more significant gains, as VVUS continued higher by another
5% on Monday.
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