TRA doubled since December 08 and rose 63% for the last month, which automatically put it in my watch list. I follow closely stocks that make 50% up or down moves in a short time frame, for which I consider a month or 20 trading days. I use a liquidity filter (average daily volume above 100k) and price filter (above $2.00) in order to escape from worthless OTC stocks.
50% move in a month is unusual and there is always a strong catalyst behind it. If you understand the catalyst, then you have better chance to understand the sustainability of the move. Many traders will consider 50% move in 20 trading days insane and will blindly short. Not so fast. A good number of those stocks have strong wind behind their back and continue to rise. I have seen stocks that rise another 50 or more percent after the initial big move.
Such types of stocks move violently and it is not wise to risk more than 0.25% of your capital on them. Always use stops. If you don’t know where you will exit in case you are wrong about the move, you are very likely to fail. Know at what point you are wrong. Remember, if you use stops, you are already doing better that 90% of the traders out there.
Certainly many on the stocks that appear on my 50% moves list are bouncing from their bottom after prolonged downturn. Such bounces are usually fruit of short covering and they are not sustainable. As a result, such stocks find strong resistance as their approach their 200-day MA and provide excellent short opportunities. Watch carefully for first signs of weakening of the trend and distribution.
In the case of TRA, the stock’s fast price appreciation was driven by a takeover bid in December. Last week it reported much better than expected earnings due to strong sales, which might add more fuel to its rocket. Last Tuesday it looked that the market was expecting this report and sold off the morning earnings’ gap. As a whole the first half of last week was charackterized by weakness in the fertilizer’s industry, which was likely the main factor that sent TRA from 25 to 22, later Wednesday afternoon. The stock managed to recover most of the move in Thursday. Friday, there was sideways action on much less than the average traded volume.
As a whole, the stock has been showing some signs of distribution lately and I would not get long before it manages for clear out 25.50 on strong general market. If you try to go against the trend and short TRA, good entry would be below 24.40 with a stop at 25.30. Target is 22.00. In this case, you will risk 90 cents to make 2.40, which is almost 3:1 reward to risk ratio. It is not the best risk/reward ratio, since the stop is relatively wide: about 3.7% of the stock price.Still 3:1 is better that 1:1. It doesn’t really makes sense to risk a dollar per share in order to make a dollar per share. Such type of thinking won’t get you very far. Your goal is to be immensely profitable, when you are right and to lose a tiny part of your capital when your are wrong. Remember, many of the best traders out there are right only half of the time and often even less than that.
Risk 0.25% of your capital. If it is 100k, you will risk $250 on that trade. 250 divided by 0.90 will give you approximately 280 shares. 280 shares * 24.40 means that this trade will engage $6832 of your trading capital.
I will try to update several times a week with new trading ideas from stocks that have appeared in my “fast moves” watch list.
Have a great trading week
