Waiting and Winning with Weight Watchers
If you are a conservative trader, then holding out for only the biggest edges isn’t just a quantified way to take advantage of short term market extremes. It’s a way to trade stocks that is consistent with your conservative nature and low tolerance for risk.
For many traders, the trade-off in having fewer opportunities to trade on any given day is well worth it. Taking advantage of two or three market mispricings a week is more than enough for many active investors who love to trade, but aren’t able or interested in trading full-time.
The recent opportunity in Weight Watchers (WTW) was among a number of set-ups in October that conservative traders who are only interested in the biggest edges were trading. The stock had earned our lowest rating of 1 out of 10, and had been trading in our “consider avoiding” category for days.
Based on WTW’s lowest possible rating, our research showed that if the stock traded higher by 3% or more the following day, there was a likelihood that a short position taken at that level would be profitable in the short term.
Weight Watchers closed higher the following day, but failed to reach the 3% threshold. That said, the stock earned a 1 out of 10 that day, earning our lowest rating for a second day in a row. This gave traders another opportunity to take advantage of WTW’s increasing potential for a short-term reversal – again, should the stock follow-through by 3% or more the next session.
Shares of WTW bounded higher on October 27th by more than 3%. And three days later, the stock was selling off sharply. Based on a short position on the 27th that was 3% above the previous day’s close (as described above), WTW finished lower by nearly 4% in three days time.
Full-time traders take advantage of short term opportunities like this every day, in stocks as familiar as Weight Watchers and Ethan Allen Interiors (ETH), which also provided active investors with an excellent trading opportunity in late October.
More information on trading stocks like Weight Watchers is available through PowerRatings. Visit our PowerRatings page, here.
David Penn is Editor in Chief of TradingMarkets