Last night I decided to write up an explanation of what I was doing and thinking about this OUTR trade I’m in and being taken to the cleaners on as of last night (12/22/2015).
The chart above is the daily chart as of about 10 A.M. OUTR had broken tail support at 37.43 and although it rebounded above that level it fell back and closed at 37.12. Not a good sign for a guy that is long this stock.
I had several things going for me though. Look at the 120 minute chart at the top and you will notice that even though OUTR set a new low yesterday the last candle of the day was a breakout of a four day descending channel. Also in the daily chart below we have descending wedge, which is a reliable indicator of as reversal.
When I’m trading a stock that has taken this large a hit I always take a look at the short interest in the stock. In OUTR’s case there were 17.7 million shares short. That is 49.2 percent of the float, a huge percentage considering the forward P/E was down to 4.68 at the low of the day.
A year or so ago I started paying attention to the number of shares short on large drops in stocks such as OUTR. What I have found is that when we reach the 80 percent mark the stock rebounds. Nothing works a hundred percent of the time but this has been very reliable to date but this is on a relatively small number of stocks. 80 percent of 17.7 million is 14.16 million. As of the close last night (12/22/2015) the shares traded since the gap was 13.86 million.
At 12:30 Central Time OUTR is up to 39.30, almost a six percent move. This is a short covering rally.
The open on any stock is the most volatile time of the day and for that reason the opening move is always discounted as an aberration. The reason for this is the retail traders enter buy and sell orders for the open, many of which are market orders. This allows the brokers to do as they please with an equity for the first few minutes of the market.
Once we past that time I entered a stop market order to buy long if OUTR exceeded the bounce high of 37.57. The ordered executed at 37.60.
Now let’s talk about what I would have done had OUTR continued lower today.
The next support level on OUTR is at 34.44. At that level the P/E would be 4.4. You must remember that P/E is an objective level of valuation. Even a poorly performing stock should be able to maintain a 7/8 P/E in this market. At 7 times forward earnings OUTR would be priced at 54.95. Just how much risk am I incurring here? To me the risk is not being in the stock. As the price drops lower and lower the risk of missing a great trade is too much to ignore.
At this point only 7 percent of my trading capital is in this stock. As I have said before I’m willing to go as high as 20 percent if necessary.
Back to the question. If it continued lower I would buy and double up at 34.50/35.00. That would put me in OUTR in the 36.75 to 37.25 in the various accounts. OUTR is up 2.30 at this point today so you can see it would be a short hop to profitability and another short hop to large gains. If it didn’t reach 35.00 I would hold my position until I got a reversal pattern of some kind and add to the trade then. If it continues down past 34.50 I will ask for prayers from all of you. No seriously, if it continued lower I would sell half the position and wait for a reversal pattern.
So why half the position and not all you say? At under 4.4 P/E this stock would be (and is now) a tremendous buy. I don’t want to sit over a bottomless pit with 4 or 5 thousand shares. The stress is too great and you can make some huge mistakes under stress.
I hope this is helpful