On Tuesday of this week I looked at online site eBay (EBAY) and discussed the potential that I saw for a short-term trade. I just want to clarify that I will never make a suggestion to buy/sell a security on this blog. This is merely for educational purposes and I will use examples and look at potential trade ideas. However you choose to disseminate the information is solely up to you. Now, what I do want to focus on in this particular post is some post-trade analysis and management. We will simply assume that this trade was made on Tuesday.
First off, look back at EBAY before the short setup was highlighted on Tuesday. I was looking at the loose, sloppy price action and the potential follow-through on the head & shoulders top that began in late March. Additionally, the stock had received far too much positive attention in my eyes, and seems to be overly loved by analysts. Here at Schaeffer’s, we like to “fade” such sentiment, and will take the other side of that trade if the chart presents itself.
Now, look at the action that followed EBAY the next several days (all of this data is as of the close on 6/6/13). EBAY closed on 6/3/13 at $53.14, and as of yesterday’s close the equity was trading at $51.52—a fairly decent drop of just over 3 percent. The lows on Thursday were at $50.83. While I still believe EBAY has more room to drop, I do think that booking profits is always a prudent move—especially when key levels come into play.
I have my chart featured below, and it includes several moving averages. The purple line is the 160-day moving average, red line is the 195-day moving average (many like to use the 200-day), and the orange line is the 320-day moving average. The dotted white lines, centered on the solid 20-day moving average (white line), represent the upper and lower Bollinger Bands. You can read about Bollinger Bands here. I felt that taking some profits off the table was a good idea here because EBAY appears to be a bit oversold. The relative strength index (RSI) has dropped below 30, which indicates an oversold level. Generally, levels above 70 indicate overbought, while below 30 indicate oversold. Additionally, EBAY has broken below its lower Bollinger Band, indicating that price is trading much lower relative to its 20-day moving average. Sometimes (but certainly not always) we can see price “snap back” off of this lower Bollinger Band rather quickly. We could also see EBAY trade even lower, but with a 3 percent move already in your favor, you should take some off while you can.
Depending on your timeframe, we could see some other key levels come into play. The next logical area of support could be the $50 level. Not only is this a potentially psychological round number level of support, but the 50-strike is also home to over 6,000 puts. Remember, puts below can act as short-term support. If you need to review why, read about it here. I would say that taking some additional profits around this level makes sense.
Finally, the last level of support could be the 320-day moving average. This is a much longer-term moving average that rarely comes into play. One thing that we have noticed here at Schaeffer’s is that stocks tend to show some short-term support at this moving average—especially on an initial test of the trendline (as a side note, you could look at any particular moving average that best suits your charts. It depends on what trendlines you place alongside price). If EBAY does break below the $50 level, and goes so far as to test the 320-day moving average, this trade would already have produced some sizeable profits. Proper trade and position management will assure that you lock in some of your winner.
These rather simple examples of analysis should help to illustrate an important lesson: putting on the trade is only half of the battle. Once you have an idea that works in your favor, be sure to not let the profits go to waste. Always revisit your trades and see if there are key levels that could potentially come into play. This will all depend on your timeframe and risk tolerance. As always, good luck out there.