RealMoney by TheStreet.com
DRYS Takes a Bath
Wednesday October 31, 10:47 am ET
ByDan Fitzpatrick, RealMoney.com Contributor
Today, we're going to take a look at the following stocks:
DryShips
Lockheed Martin
Seagate
GameStop
Yahoo!
Yesterday, I was talking with Karl Eggers on BizRadio out of Houston, Texas. We were discussing the challenge of trading Chinese stocks and my contention was (and is) that these stocks really need to be traded using a healthy dose of technical analysis. Information is a bit more difficult to obtain about Chinese companies than it is for other companies, which makes fundamental analysis more problematic. Also, many Chinese stocks are terribly volatile.
But my main point was that investors and traders alike need to trade in stages -- make incremental buys and sells so that there is never too much capital at risk in one trade. This also puts you on the right side of the emotional curve.
Think about it. If you make a purchase with just a small amount of money, then you don't feel as much anxiety on a price decline as you would if you had a full position that was bleeding badly. As such, you would be less prone to panic if the stock fell hard.
On the other hand, if you had loaded the boat on some Chinese stock because you just knew that the stock was destined to go to the moon, imagine your panic and fear you would have if the stock sold off. You'd likely sell right when you should have been buying more.
When you start small, you are afforded the luxury of being able to think clearly when it becomes apparent that you did not catch the precise bottom. When the stock of a company you like pulls back, you see opportunity, not disaster. And if the stock in question is particularly volatile, it doesn't take too long for a move in the right direction to make your initially small position into an outsized position.
Either way, you are dealing from a position of strength. You never feel as if one big move can take you out of the game.
So if there is one skill that most traders should work on, it's the method of starting small and building as you go. It always feels nice to add to a small winning position because that's good money after good money. But adding to a large losing position feels wrong ... like adding good money after bad.
OK, let's look at some reader requests.
Yesterday the dry bulk shippers all sprang leaks, and DryShips was one of the worst. The stock fell close to 20% on impressive volume. I'm not one to catch a falling knife, and DRYS sure looks like it's leading with the sharp end pointing down. But I'd watch the stock closely to see if it firms up at around $100 -- that's right about where the 50-day moving average will be in a few more days.
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Lockheed Martin broke out of a prolonged volatility squeeze in September and ran another 10% before consolidating in a sideways pattern. With the stock currently drifting between $105 and $110, I'd wait for a resolution of this congestion before buying.
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Seagate has gained about 40% since bottoming in June. The stock has been all over the place, though, carving out a rough channel between the upper and lower Bollinger Bands. If light of the volatility, there is no real need to buy on anything other than a tag of support. Sooner or later, that event will occur. So if you like STX, consider just putting a limit buy order along the 50-day moving average.
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GameStop has been in a volatility squeeze over the past few weeks. If the stock can push above $60, you can bet that it's starting the next leg higher. But if the stock falls below the 50-day moving average, I'd sell.
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Yahoo! ran up almost 50% since the September low; but the last few days have been brutal. I guess partial ownership of Alibaba just didn't cure all that ails the company -- although after a 50% run-up, all it takes is one little hiccup and the stock pulls back hard. I'd wait for the stock to reach about $28 or so. That's where the last real support level was; and that's probably where the most buyers will materialize.
Be careful out there.
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