Last Thursday, four high profile stocks fell hard: Wynn Resorts (WYNN), Las Vegas Sands (LVS), MGM Resorts (MGM) and Restoration Hardware (RH). For many experienced market professionals, this type of action can be quite attractive. While I’ve had my share of bullish positions go south on me in my career on quick swoons, I know that this type of volatility creates countless opportunities. In three days, you might be able to buy WYNN stock, LVS, MGM and RH at a discount. It’s a lesson I learned from the dot-com bubble.
I began my career on the floor of the Chicago Board of Options Exchange in 1999 straight out of college. For a year, I stood next to two options trading legends, soaking up all of their wisdom as their clerk. That year, the market ripped higher as virtually every dot-com stock exploded higher day after day. I learned a great deal during that bull run.
Here is a picture of a younger me (with more hair) with my grandfather at the CBOE.
Then, soon after I became a trader myself, the Nasdaq fell apart. The dot-com bubble burst, and valuations were reset for virtually the entire market. During those bearish years, I learned even more than during the bull market of the previous years.
And one rule that I took away from the bear years-and that I continue to tell subscribers to Cabot Options Trader and Cabot Options Trader Pro-is about stocks that have taken a big dive.
The old trading rule that was hammered into my brain by my two trading legend mentors was this:
If a stock took a big fall, whether it was on earnings or some other news event, you MUST wait at least three trading days before even thinking about putting on a bullish position.
The rationale behind this theory is that if a large hedge fund or institution owns millions of shares of a stock, it won’t be able to sell out of their entire position in a day or two without causing the stock to fall.
Instead, the institution will parcel out its sales over a couple of days, so they don’t depress the stock so much that they sell at bad prices. For example, let’s take a look at LinkedIn (LNKD), which fell from 192 to 108 in one day last February 5 on a disappointing earnings release. That was a staggering fall! The next day, the downgrades came pouring in from the brokerage houses (thanks for the downgrades after the fall!).
Based on the three-day trading rule, I wouldn’t have considered adding a bullish position on Friday, February 5, Monday, February 8 or Tuesday, February 9. But on Wednesday, February 10, according to the rule, I could begin to think about adding a bullish position.
Here were LNKD’s closing prices on the day of its earnings report and the following days:
As you can see, there remained selling pressure on LNKD in the three days after the big drop. Then, slowly but surely, the stock stabilized, and buyers began to take back over.
I did not buy the dip in LNKD after the three days that the rule mandated because other stocks offered much better opportunities than LNKD. But I may try and buy WYNN stock, LVS, MGM or RH three days after last Thursday’s fall - which would bring us to tomorrow, Tuesday, December 14. It will depend on what’s happening with those four stocks after the mandatory three-day waiting period is up.
Regardless, they’re worth checking in on later this week. If you decide to buy WYNN stock, LVS stock, MGM stock or RH stock then, you might be getting in on bargain stocks right as they’re back on the upswing.
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