Trading Lesson - Don't catch the falling knife!

Here are two examples of equities that I recently discussed as potential low risk buys.  I was wrong about both... they have each gone lower since then.  But the important thing to remember is that no money has been lost because the trades have not been entered!  One of the trade initiation triggers is for the downtrend line to be broken.  That did not happen in either case here so neither position was initiated. The lesson here is do not try to catch the bottom!  Wait until the downtrend line breaks and buy it on the way up!

 

Here is what I said about QEP on July 25th:

QEP Resources Inc. from July 25th – QEP has been consolidating around the $9.50 level over the last month, although it still in a downtrend.  This is the same level that it found a bottom at in early 2016.  If you are Bullish on the prospects of this company this is probably a good time to buy it.  A possible strategy would be to buy it once the downtrend line is broken.  There is nothing mysterious about trendlines.  They are simply graphical representations of the forces of supply and demand.  When something is in a downtrend it means that the forces of supply are in control of the market.  When the trendline is broken, it means that the forces of demand have taken control, or at least have become equalized with the supply forces.

 

Here is how QEP looks today.  This is the same chart as the one above.  It is just a different time scale and I added some text...but it is the exact same trend line.  I haven't altered it.  I promise.   This trade wasn't entered because the down trend line was never broken!  This prevents getting 'run over' or 'catching a falling knife'.  Interestingly enough, now the $9.50 level will probably be resistance and I am watching this now for a possible short.

 

Here is what I said about BBRG on August 1st.  I made the important text Bold but I didn't change anything else.

Bravo Brio Restaurant Group Inc. from August 1st - BBRG is on my radar screen for a potential long trade.  When looking for potential trade ideas, I like to look at the list of stocks that are making new 52 week lows.  Then I see if any of these stocks are trading at levels that were important lows or support levels in the past.  That is the case here.  It has been in a freefall since breaking support around the $4.50 level in early July.  That level support from early March until then.  Now it is trading right around the $3.50 level.  This level was the low last November and again in January.

Again, I will repeat my Mantra...I won't enter the trade until the stock has broken it's downtrend and is on the way back up!  Too many investors, both professional and amateur, try to catch the exact low trade.  I think that this is due to the human compulsion to prove that they are smart.  However, the Risk Reward dynamics are much better if you wait until the downtrend is broken.  You won't catch the exact bottom but you probably wont get run over either.  If the current levels break it could head much lower.  If the current levels hold, then it will probably rally and trend higher.  

In this case, I wouldn't buy it until it gets back above the $3.50 level.  This will probably mean that the downtrend is over, and that it is in fact trending higher.  I'd have my stop-loss at the $3.50 level, and I would have my long-term sell target at the $4 level.  I would have it there because that was where the lows were in February, so there will probably be resistance there.

 

Here is how BBRG looks today.  This is the same chart as the one above.  It is just a different time scale and I added some text...but it is the exact same trend line.  I haven't altered it.  Once again, I promise.   This trade wasn't entered either because the down trend line was never broken!  This prevents getting 'run over' or 'catching a falling knife'.  Interestingly enough, now the $3.50 level will probably be resistance.  Unlike QEP however, I won't watch it for a potential short because the price is too low and if the downtrend breaks and if the resistance around $3.50 breaks, it could head significantly higher.  I continue to watch it for a potential long.