Click chart to enlargeYou should all recognize this chart. It contains a lot of good lessons. We were trading it when it was trading above its uptrending moving average and within its well-defined uptrending channel. It was never a large position for us because we simply didn't understand the hype of rubber shoes that could be knocked off at 10% of the price of the original. Still, we couldn't fight the trend. We rode CROX up into the 70's and lightened up as it approached the top of its channel in late October. We sold out completely ahead of earnings because we simply did not want anything to do with a rubber shoe company. Once it was trading below its downtrending moving average, in a well-defined downtrending channel, we added it to our short list.
If you're thinking it looks like a buy here, we think you're crazy. It could very well return a nice 20 to 30% profit in a very short time. However, the rules of trend channel trading are that you only own stocks that are in an uptrend, and only short stocks that are in a downtrend. Shorting an uptrending stock as it nears the top of its channel is equally suicidal. Fighting the trend is a sure way to lose capital.
We think CROX is headed to single digits. Just as it isn't too late to buy an uptrending stock as it hits new highs, it's never too late to short a stock making new lows. Unless, of course, it slips below $5, at which point shorting is not allowed. Although we think CROX is headed lower, we wouldn't short a stock at the bottom of its channel. When it returns to its 50dma, it may once again be a good short.
If you post something like this on a CROX message board, devoted longs will hurl fundamental drivel at you faster than you can dodge it. They'll try their best to convince you that the stock can't go any lower because the p/e is already too low, or the rubber shoes have a new patented cushion sole, or, well you know the deal. Our problem with fundamentalists is that these are the same people who said that based on their "calculations", this stock couldn't go lower than $60, and $50, and $40, and $30 and so on. Fact is, any stock can go to $0. Including 84 year old $170 bulletproof Bear Stearns. The lesson of the CROX chart is simple. Make sure all of your positions agree with the direction of the trend... never fight the tape.
5 comments:
Nice one snot. I wish I had enough money to open a margin account. Most of the stocks in the last few months have nice downtrending channels.
Do you know of any having uptrend channels? I am out of Ag for now. waiting it to come down. Same for steel. Do you have any other picks?
ETFs like SKF are also near the top ends now.
--clarke
Hey Snot- I was curious if you're still holding FXP and if you're still targeting 91 as your exit price? I've found the movement of FXP very frustrating lately, as I'm sure you have as well.
Thanks in advance. Craig.
Clarke,
Try to get yourself a margin account, even if it means withdrawing money from your regular account to do it. While the common misperception is that stocks go up over the long term, the truth is that most of them actually go down. This leads to endless frustration for investors that can't play both sides of the market.
We know of a lot of uptrending stocks, but no other sectors where several of the stocks in the sector are trading in clearly defined uptrending channels. You can check out precious metals gold and silver (GLD and SLV). They broke thru the tops of their channels in Feb, only to come crashing back in March. Same with DBA. They all still remain in an uptrend. We just wish they had stayed within their channels. They scared us away. Oil stocks are also uptrending. RIG and PBR come to mind, but they aren't within tight channels. We scan the market at least once a week to see if we can find any new trends beginning. Of course when we find one, we'll be posting it here. It's not just a matter of finding a good chart. It also has to have market cap, volume, institutional sponsorship, and popularity. Not so easy to come across. It may just turn out that we wind up trading Ag for the rest of the year. The only thing that may change with the times are the hedges. The SKF trade is over at the end of this week, so SMN will have to take its place, especially if Ag blows off (surges above its channel), which is entirely possible before it corrects.
Thanks a lot snot. I like this blog, will keep visiting to check out new picks.
as for margin - I wish I had so much money. I finish college in June and start working then. Hopefully, I shall have enough money in a 2-3 months after that.
I got burned in gld. It busted out of its channel to resume its uptrend. Got out with a minor loss. I am tempted to go for SEED in Ag, it looks like a nice symm. setup with vol confirmations, same for NUAN too.
--clarke
Craig,
FXP has been very frustrating. We did sell some and replaced it with SMN and DXD. We still have about 1/3 of it. Just waiting to see if the Dow will drop hard. FXI is forming a little triangle, with support at 140 (FXP 84.5).
We're hoping the CPI brings the market down tomorrow so FXI can break that support and allow FXP to run up again. We don't mind holding it right now considering it's just consolidating.
Even if FXI is on the verge of forming a new uptrend, it should retrace half of its recent rally first. That would put it at 135 or so (FXP 92). We're waiting patiently for that. Only if it moves strongly against us will we get out at a loss. If it does move down again, it will be because the market is doing well, in which case the Ag stocks will be making up for it. When we lose, we try to break even instead of outright lose. A bad month is one in which we don't profit. We rarely end the month in the red. It's all just a balancing act.
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