(A version of this column appeared in optionMONSTER's
newsletter of Feb. 23. References to specific trades reflect
pricing and activity at that time.)
Coulda… woulda… shoulda…We all have them. Today I want to explore
some trades I should have done, in the process demonstrating how
our minds can work against us. This is crucial because, without
training, some basic tendencies of the human psyche inevitably work
Let's first consider VeriFone, whose credit-card readers have been
taking over retail locations across the Americas. I have frequently
noticed this stock as it marched from the single digits in 2009 to
over $40 now. The story is simple: PAY thrashes estimates virtually
every time it reports earnings, and investors have sent it on a
monster run in the process. Every pullback has been met with
January 31 was one such occasion, when our Heat Seeker program
detected a large trade on the stock. The strategy in question was
complex--a bit too fancy for my liking--but it served as a
reminder: "PAY is still in an uptrend, and it's had a pullback."
Disgustingly, I stood flat-footed and did nothing as the stock
proceeded to rally more than 20 percent in barely two weeks.
I didn't take my own advice.
For instance, the shares had pulled back to their 50-day moving
average--an indicator I gushed favorably about only days earlier!
Based on those technicals, plus the consistently strong
fundamentals, the PAY move was both predictable and probable--thus
matching another set of criteria I laid out earlier in the year.
Furthermore, the same 50-day moving average provided me with a good
stop-loss level to escape if the stock had an unexpected reversal.
The second lost opportunity was in Abercrombie & Fitch, which
has repeatedly caught my attention since last summer--gapping
higher on strong news, pulling back, and continuing higher. This
trend unfolded again in December and January, when it climbed to
its highest price in more than two years, and then fell back to the
$49-$50 level where it had peaked in April. ANF started inching its
way higher, and the next thing you know it had rallied more than 10
Another stock I had been watching for weeks and failed to buy
around the same time was Western Refining, which had also pulled
back to its 30-day moving average (green line on chart) and then
proceeded to rip higher by more than 70 percent!
One lesson from these non-trades is the incredible power of
lethargy. Yes, the history books and movies are full of heroism and
action, but most of what we do in life is a whole lot of nothing.
We may coldly look at a chart and have every technical and
fundamental reason to buy or sell--yet never act.
Without training, our minds act on emotion and not intellect. As a
result, we often do exactly the wrong thing: The stock rallies and
now we're upset (emotion) because we missed the trade, and then we
chase it. Then we enter in the middle of a move, without a good
stop-loss or a thoroughly considered risk/reward profile. Yes, we
could make money, but it's not much different from buying a lottery
ticket at that point. Fortunately, I didn't chase PAY, ANF, or WNR.
The good news is that there are still plenty of opportunities out
there. And, to paraphrase Warren Buffett, the great thing about the
stock market is that you can take as many strikes as you want
without striking out.
So I'd like to mention some stocks that have been trending higher
and may now be setting up for a bounce. Each appears to be
technically and fundamentally attractive, with the potential to
offer a nice risk/reward profile. But they're just ideas, so please
do your own research.
Hertz Global Holdings:
The car-rental sector has been quietly rallying, and a steady flow
of buying drove HTZ from about $13.65 in mid-January to $16.50
earlier this month. Now it's pulling back. Look for it to hold
support at previous resistance around $14.80, where the 30-day
moving average should catch back up. It could climb to $20 or even
$25 in coming months.
Yes, the same. Two sessions in the red have brought the shares back
to just over $45. That was resistance in January, so now it should
provide support. A stop-loss around $44.20 and an upside target of
$50 give us a decent risk/reward profile.
I will not pretend to understand this company, but Barron's said in
December that the student lender could return to $20. There must
have been some merit in that opinion, because the stock gapped
higher and has been trending upward since. Yesterday it fell hard
and may have further downside--perhaps to the $14 level where it
peaked in April 2010--so it's one to watch. But there is likely
more upside in this name, and it should be on your list.
This name has been climbing thanks to platinum and palladium, in
addition to operational fixes at some of its mines. Now it's pulled
back to its 30-day moving average and seems to be probing support
around $22-$22.50, an area where it peaked in March 2008.
A relatively obscure mainland Chinese semiconductor maker. Taiwan
is better known for chips, but SPRD has been running like a horse.
Its valuations are still extremely low given its growth trajectory.
It's also had a nice pullback and seems to have found support at
its previous high around $20.50.
Deere, Mosaic, Potash, Intrepid Potash, Titan Machinery. Learn
them, study them. They're in the midst of a secular bull market and
will provide many opportunities for buying the dips in coming
months and years.
(Chart courtesy of tradeMONSTER)