If you follow the markets intraday, you probably are well aware of the action in HLF. It currently sits atop of StockTwits trending tickers. I will not get into David Einhorn’s questions and the news surrounding the stock but I think there a few great lessons from today’s action.
First of all, for the intermediate trader, HLF highlights the importance of heavy volume when buying at a pivot point. HLF had been performing well this year through the strong uptrend and into the mild correction where it was supported at its 50-day. There were no major signs of institutional selling (until today). A square-box base (which you can read more about here) appeared with a buy point of 72.21 along with a moderate bounce from the 50-day while the overall market showed slight signs of accumulation. However, heavy volume in HLF did not appear in this buy range so a buy here was more risky.
A more aggressive trader, knowingly accepting more risk and thereby decreasing the position size, still could perhaps have purchased around 72.21. A reasonable stop-loss from this point would have been under the 50-day moving average around 66.33 or slightly higher than 66.33 just below the April lows which would have prevented a major loss (as evidenced today) but also would have given the stock enough room to handle the potential typical swings. Selling at around 66.33 would have resulted in an 8% loss which would have prevented a 25% loss by holding on. Of note huge volume to the downside like today typically points to future selling at least in the short term.
Another rule some traders follow is to avoid starting a position right before earnings. I do not follow this rule exactly but it is certainly something I consider before purchasing a stock. From my experience, growth stocks that appear to be performing well are performing well for a reason and strength before an earnings report can be a sign of a strong earnings report on the horizon, such as recently shown by ISRG, GNC and today in FIRE. Obviously, this is not always the case as evidenced by HLF today and in even AAPL which was performing poorly into a strong earnings report.
If one wants to signficantly lower risk, one could possibly steer clear of buying stocks within a week of their earnings report but one should also only buy with heavy volume within a buying range and always prepare a stop-loss before starting a position.