Stocks are trading lower ahead of a busy and exciting day. Some of the highlights include: the much anticipated Uber IPO, the ongoing trade negotiations, as well as it being (weekly) options expiration day.
One thing we know for sure is that there is more volatility in the market than there was last week.
What does that mean for our trading?
Well, it means a lot, let me explain.
You see, there are two main styles of trading:
- Go with the trend: short stocks when they are selling off and buy stocks when they are rising.
- Go against the trend (aka contrarian): buy stocks when they’re selling off and short stocks when they are rising.
You can make money with either style. And to be fair, I’m one of those traders who will do both. However, how you trade each style is critical.
For example, going against the trend is a difficult strategy if you are a day trader. You are basically saying “this stock is up too much so I’m going to short it because this move isn’t sustainable”
Your timing and position sizing needs to be excellent to achieve success as a day trader by being a contrarian.
(Imagine trying to fight the tape on BPTH when it went from $12 to $70, stocks can stay irrational longer than you can stay solvent)
However, what if you gave yourself more time, let’s say a few days, weeks or even months. The chances of the stock price “mean reverting” increases.
Warren Buffet was actually excited that Apple and some of the stocks he owns were down on Monday after the trade deal talks fell apart…
Because his time frame is not minutes…it’s years… and in the long-term he believes his thesis will play out. And based on his track record who could argue.
We don’t have to wait years to make money on contrarian trade ideas. We can achieve excellent results by swing trading. That said, let me share with you two recent contrarian trades I’ve put on… you’ll learn the thought process between contrarian trading, as well as, how you can use levels of support and resistance to pick your entries and exits.
“The trend is your friend.”
You’ve probably heard that old adage before. Now, most of the time, that’s true. However, there are some times you want to go against the trend. In other words, you want to be a contrarian trader.
Now, if you don’t know what contrarian trading is… it’s simple.
A contrarian trading style goes against current market trends. For example, value investors want to buy stocks or options when they’re performing poorly… thinking they’re oversold and could catch a bid.
You might be thinking, “Kyle, does that mean you always go against the market?”
Well, not necessarily. Just because a stock is beaten up, that doesn’t mean I’m going to buy it. Conversely, if a stock is skyrocketing… that doesn’t mean I’m going to try to short the stock or buy put options.
You see, I’m looking at charts and catalyst events to get into contrarian trades.
That said, let’s take a look at some recent contrarian trades I’ve had and the thought process behind them.
Contrarian Trades Case Studies
Now, one contrarian trade I recently took was Weight Watchers (WW). The stock has been beaten down over the last few months (down over 50% since November 2018).
Here’s a look at the daily chart in WW.
Now, the idea isn’t to buy the stock as it’s falling… some traders will try to use the contrarian trading style and just keep buying on the way down. However, that’s not how I use this trading style. You see, I’m not trying to catch a falling knife. I’m picking spots (that means buying calls or stock, or selling to open put options) to express my bullish opinion on the name.
Here’s a look at the chart I was watching in WW before I entered a contrarian trade.
Check out the chart above. WW finally looked like it found a bottom around the $18 level (it’s a clear support level).
Now, the first trade I put on was a sell to open WW $17.50 puts. That meant I collected a bit of cash, and as long as WW stayed over $17.50, I would keep that cash (which it did).
A few days after WW found some support around the $18 level, it caught a bounce.
Now, I figured this was a good time to get long some call options. You see, there was an upcoming catalyst (earnings). Not only that, but Oprah has some ads for Weight Watchers, which could’ve been a catalyst for a better-than-expected earnings. In turn, that would cause a reversal in the share price.
Here’s a look at what I sent out to clients.
(Want to start receiving trading ideas and alerts like this one in real-time? Click here to find out more)
Remember that gap we were looking at (the blue horizontal line at $22)? Well, I figured if WW could break above that, it could start to fill the gap… in other words, if WW broke above $22, it had room all the way to $30 (or higher).
Here’s a look at what WW did after its earnings announcement.
I sold most of my position for a 100% gain. However, I’m still long some call options in WW and letting those options ride (it’s practically risk-free at this point since I can’t lose money on the entire trade).
Keep in mind, buying stock or options ahead of earnings and holding into it could be risky… and I don’t do it too often. When I do buy options ahead of earnings, I keep my position size small relative to my account… so that trade can’t really hurt my account.
Another Contrarian Trade
I took on another contrarian trade in Overstock.com (OSTK) that has been beaten down. Now, OSTK has a few catalysts on the table.
Here’s a look at the daily chart on Overstock.com (OSTK).
Overstock just launched a platform called tZERO (a blockchain platform), indicating the company was transitioning its business model and entering the cryptocurrency market.
Not only that, the company was set to report earnings when I was looking to get into the options. Now, I didn’t expect killer numbers, but the sentiment has been extremely poor in OSTK. It was similar to the WW trade. Basically, all OSTK needed to do was give an update on the tZERO platform or announce “ok” numbers just to see a big pop.
Additionally, the stock had a high short interest (45% of the shares outstanding are sold short). Now, if you don’t know, when a stock has a high short interest, if there’s a positive catalyst and the stock runs higher… the shorts will have to cover. In turn, this could cause the stock to have an outsized move to the upside.
Now, I bought call options on Monday with all the catalysts in OSTK.
Here’s a look at what the stock did after its earnings announcement.
The company reported better-than-expected revenue, and improved its outlook for its retail business (sending shares higher by 17% at one point). The stock is breaking above that downtrend line, and could run further from these levels. Take note: I’m still long call options in OSTK.
Remember, if you want to get into contrarian trades, pick your spots. Most of all, the stock should have upcoming catalysts. If you’re just buying a stock just because “it’s down too much,” you’re simply gambling and trying to catch a falling knife.