As retail investors, one thing that is common to us is where to buy or to hold when a stock price declines rapidly. Since we recommend a falling knife catching trade yesterday (didn’t turn out good due to decline in earnings), I would highlight the criteria of a ‘safe trade’ catching a falling knife.
First, let’s look at intra-day movements where the stock price had been subjected to intense selling pressure or merely consolidating at previous closing price.
Usually when one sees illustration A, it might seem like the sign is clear where there are plenty of buying quantity and buyers are coming up to support the price.
This market forces are almost the opposite of what the naked eye sees. To an untrained eye, illustration A is a buy while B is a sell. But buyers and sellers queuing are never sincere with their orders. Orders are subjected to change and in modern times, it gets worst with computerised algorithm making these queues.
But always remember that the volume rule of thumb is still in play.
Low volume price rise = Temporary price rise
If the stock would to go up without much volume in play, the response might be lackluster towards the price increase. Sellers might not queue their stock but immediately they might realize that price had gone up and the stock they are holding to (probably stuck for a long time) needs to be unloaded.
High volume drop = Permanent price drop
The availability volume on the buy side is key for an institutional investor. A person who wants to unload big amount of share looks upon volume to unload. Illustration A fits the criteria.
In fact if you look at illustration B, one couldn’t unload much under these circumstances unless fraudulent cases hit the company so bad that everyone is planning to leave the shareholding immediately.
This is why initiating a buy on illustration B with thin volumes could benefit you more than buying with mostly where all the buyers are in illustration A. A low volume drop ensures that a stock could rebound quick similarly to sell, buyers would begin to realize it hits their target price.
Another bonus rule of thumb to remember always would be…
Think like an Institutional Dealer
These guys like to do block trades as it is easier to compute on the back end. As institution holding large percentage of a company it is hard to find the same party on the buying end to take up your stock. When opportunity comes, it is now or never. That is why a stock may lag years but could move in a blink of an eye.
So Why Did we Call a Buy on MIKROMB Yesterday?
- Did you realize that with the OBV indicator, the rise previously was much higher than before? When OBV rises and forms a higher high, it is a sign of accumulation. We know that people are accumulating this stock prior to the release of results expecting good earnings report.
- If your accumulate the days since 1st November, you will find out similar data where accumulated net volume was up 11 million shares.
- Probably the most important thing and you should never catch a falling knife unless you stock fits this criteria. Based on research, we know that MIKROMB is poised to continue its growth that it is showing so far.
If you buy at the wrong point this time around but knowing that the stock still has plenty of room to grow, the decline would open up opportunities to buy lower. That is by far the best thing that could happen.
Buying stocks with good fundamental still ensures that you win the long term game while suggestions in catching the falling knife provides an edge by possibility accumulating at low prices.