Many traders make the mistake of chasing sharp upward moves in stocks on bullish news. Institutional and professional traders with their real-time news scanning software often drive up prices before the news even filters into most retail traders' feeds.
And then there is the "sell the news" phenomenon. Even if the upward move triggered by the bullish news lasts several sessions, it's impossible to tell when it will end. Remember, the same institutional and professional traders who sent shares higher initially can send them right back down when they decide to take profits.
The goal is to be on the same side of the move as the big money. When the initial surge higher ends, it's generally due to the pros taking profits. They will often then wait until the stock reaches a discounted level before buying again, thus pushing prices back up.
Savvy traders have rules about when to buy after a pullback. Some base it on duration, others on the intensity of the pullback, and still others on support levels derived from Fibonacci numbers or other indicators.
My personal rules for buying pullbacks such as this are as follows:
1. Price cannot fall below the 200-day simple moving average (SMA).
2. Wait for the first higher daily close to buy.
The 200-day SMA is the line in the sand that differentiates a stock that is likely to bounce back or continue lower. And waiting for a higher close confirms shares are being bought. Yes, I miss some of the upside this way, but the decreased risk is well worth giving up a few points.
Today, I have a perfect candidate for this strategy: TeleCommunication Systems (NASDAQ:TSYS).
The mobile communication technology company operates in two segments. The first provides cyber security, professional services and secure deployable satellite solutions to the government. The commercial segment enables 9-1-1 call routing through cellular, VOIP and other technology.
On May 1 after the close, the company reported first-quarter results. Revenue of $85.1 million was an 8% increase from the previous quarter but down 10% year over year. Adjusted net income rose to $2.2 million from $2.1 million in the year-ago quarter.
Highlights for the quarter included a new $6.8 million U.S. Army contract, 14 new patents issued, and a $291 million funded contract backlog as of March 31. This, combined with upbeat growth and expansion statements from CEO Maurice Tose, sent shares sharply higher after the release.
Following the announcement, the stock soared from a close of $2.59 on May 1 to a 52-week high of $3.39 on May 12 -- a 31% gain in just seven sessions.
Then, predictably, came the selling, with shares falling about 12% from those highs to just under $3 as I write.
TSYS is now a buy on its first daily up close as long as it remains above its 200-day simple moving average, currently at $2.43.
Recommended Trade Setup:
-- Buy TSYS on first daily up close unless 200-day SMA is violated
-- Set stop-loss $0.50 below entry point or at 200-day SMA
-- Set initial price target at $3.39 in 60 days
-- Set stop-loss $0.50 below entry point or at 200-day SMA
-- Set initial price target at $3.39 in 60 days
By Dave Goodboy
No comments:
Post a Comment