Wednesday, November 16, 2011

A Trade I Simply Cannot make

Sometimes, when a stock gets hit, it may be profitable and prudent to play support bounces. However, sometimes, even if there is a bounce opportunity, the risk outweighs the reward potential so much that it is simply a trade I cannot make.

Take Abecrombie & Fitch. They reported dismal earnings, however, looking at the margins and debt, they are a wonderful company, and this drag on the economy is causing the stock to get pummeled. However, seeing as the company is growing beautifully in general, this may be a great opportunity to get great book value for very cheap market value. The holders of $ANF are disgusted by the recent earnings, and selling out for fear the growth is over.

This might present a rare buying opportunity for cheap. However, as a technical trader first, when a stock breaks every level of support like a hot knife through butter, we are being told that this stock is being killed for a reason. And if indeed big money sees value in a great company caused by minor earnings bumps, than bids would indeed hold this support. And they are not. So maybe, this theory that, this "temporary" earnings disappointment is merely a reflection of global economic woes, and this company is still poised for speedy growth, is not true, and the slowdown is for real. As we can see from the speedy support slicing like dominoes, value funds do not see a reason to bid for $ANF. So while a bounce happens many times off support, these realities make the risk far too poignant. Thus, this is a trade I simply cannot make.

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