What I’m Expecting From This Trade

I bought $AAXN today at $38.20.

It showed up in one of my favorite scans to run when the market is down three days or more in a row. The scan is simple; it spits out every stock and ETF that is down three days or more in a row and up today c1<c2 and c2<c3 and c3<c4 and c>c1. You can add a liquidity filter, a price filter, a moving average filter, etc.  And if you want to get a head start before the market opens and just see all the stocks that are down three days in a row or more just take out the last part of the condition (c>c1).

I believe that in the short term (1-20 days) what matters is the most is momentum and mean reversion. Stocks tend to bounce back after being down multiple days in a row and momentum is something that exists and has been around forever. But more importantly, if you take a look at the best-performing stocks in the last month, you’ll notice that many of them–25 to 30% start their short-term moves after being down multiple days in a row.  The key for me is to wait until we have an up day to get involved, this is important because three down days in a row could turn into four days, five days, six days, and so on. Once you get the up day then I’m looking for the stock to bounce like a tennis ball, I’m looking for it to go up multiple days in a row without violating its previous day low, for example;

• If the stock violates its previous day low after the initial bounce that’s your first warning sign.
• If the stock breaks the last down day low, then all bets are off.
• If the trade works out as expected and it goes up multiple days in a row, then I believe you should sell some on the way up.
• If you wanted to try to squeeze as much out of the trade as possible, you can leave a runner and raise your stops every day to the previous day low. Sometimes it will take you for a long ride as you can see in the two examples above.

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