KM, There are several things you can do to protect yourself from sudden/sharp reversals like that. First, I'd say that given what happened, it sounds like you handled it pretty well, as best possible. When you're caught like that and it's too late, it's often better to take your medicine and get out any way you can. Many big/long selloffs start that way, and you don't want to get "trapped".
The biggest thing you can do to protect against that, is start watching the S&P Futures and/or Bond Futures on a real-time chart, I like to watch the S&P's on a 2 or 3 minute chart. If I see the S&P's starting to tank hard, I'll go flat everything I'm long in a hurry. It's an excellent indicator, as the kind of situation you describe rarely happens in a vacuum. If you can't get the S&P's, at least watch the $TICK indicator and the Dow (even the bug on CNBC is helpful) closely throughout the day as an advance warning indicator.
Having the S&P's handy can also be a good indicator if you're long something and it's pulling in a little. Often, I'll stay long and ride something for more profits, because I know the S&P's are staying strong.
Another thing you can do, is before you trade it, look at the daily bar chart for the stock in reference to the 10-day, 20-day, and 50-day moving averages. The kind of climax sell-off that you describe, is much more likely to occur when the issue gets very "extended", for example way out in front of the 10-day moving average. When you're trading them up there, you have to be like a cat on a hot tin roof. The more ideal place to trade them long is when they're trending up above their 50MA, maybe between the 20 and the 40 day MA's where they're not so prone to sudden reactions/failures. This is true for all tech stocks; some more than others.
Some of these sharp sell-offs are real (based on reaction to specific news, reported or unreported), and some are "technical". I'd always be checking to see if there is any fundamental "news" effecting the stock reported or rumored (you said it was for no reason, so that points to technical), or if it's just a technically-driven selloff, that is just psychological fear/greed group behavior. When a stock is extended way out above the MA, it's potentially like the first person out of the burning building sort of situation on every pullback. The panic (technical) selloffs are more likely to reverse back up quickly, perhaps the next day. So sometimes, I might hold a stock through a "trap door" event like that; but it usually will prove unwise.
Another thing to be cognizant of, is fair value in relation to program trading triggers. A lot of the Wall St. firms have fixed trigger points where they will go into the market and sell huge quantities of certain stocks, when the futures trade at too much of a premium to stocks. There are some ways to detect this, but it's simpler just to watch the S&P Futures - you'll see it when the "sell programs" hit. Sometimes, the sell programs are hitting the tech stocks and the internets; at other times they are more concentrated in the listed stocks, and the other sectors like financials and cyclicals. It's a good idea to step aside or get short when they're running those things repeatedly throughout the day.
Stepping back a bit, if you're going to trade internet stocks, you have to recognize that this sort of volatility is going to "get" you once in a while. So what I have done, is build up a "war chest" of profits from trading these mongrels that I track; and I never let them take back more than a certain % of it. In these stocks, your stops have to be wider, and the losses are going to be bigger. But, the profits are bigger too. But, you must be nimble - or they'll blow you out of the water, and take back your profits on these things.
BTW, some of the more conventional tech stocks will trade that way too, at times. INTC comes to mind - they love to jam that thing down six points going right into the close, out of the blue for no reason. Usually, it recovers the next morning.
Regards, -Steve |
