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Investors Business Daily
Investors Business Daily
Business
JUSTIN NIELSEN

Downside Reversal On SMCI Stock Was Strong Warning Sign

It's so much easier to trade when the market is in a confirmed uptrend. But that doesn't mean it's without pitfalls. A recent swing trading setup in SMCI stock didn't work. But recognizing weak action saved the trade from even larger losses.

SMCI Stock Shows Relative Strength

One of the best ways to start building watchlists during a bear market is by looking at stocks that show relative strength. Once Super Micro Computer crossed above its 50-day moving average line in October (1), it barely looked back. A strong move on earnings (2) and a rally through November led to a 50% move in SMCI stock in just over a month (3).

It's OK to miss a move like that, but it shouldn't escape your attention. Such action often leads to subsequent strong moves and needs to be watched carefully for future opportunities.

Look For Support In The Pullbacks

It's during bases and pullbacks that your technical analysis skills are critical. SMCI stock pulled back through December but wound up finding support along the way.

On Dec. 6, an early bounce from the 21-day line showed a positive upside reversal (4) while indexes were taking a hit the same day (2% loss for the Nasdaq composite and 1.4% drop for the S&P 500).

At the lowest part of the pullback in SMCI stock (5), it still held above its 50-day moving average line. It found support at that level again (6) though the indexes were undercutting recent lows.

Market Outlook Shifts To Uptrend

The Jan. 6 follow-through day on the indexes prompted more willingness to increase exposure — within reason. The day after the follow-through day, SMCI stock showed a nice break above its recent downtrend with a spike in volume (7). It joined SwingTrader just under 90.

At the time of our entry, the low for the day was at 85.91. This seemed to be a reasonable stop. If SMCI stock couldn't hold above that level that would mean the trendline was still acting as resistance and it was still in its pullback phase.

Exiting Before Things Got Worse

We saw a lot of downside reversals that same day. The S&P 500 moved above its 50-day line but couldn't hold above it and resistance seemed to be rearing its head again.

Most importantly, SMCI stock triggered our stop. Because of the widespread downside reversals, we didn't hesitate to remove the stock from our list before things got worse. Better safe than sorry. It fell another point from our exit by the close to finish more than 7% off its peak for the day.

Things got worse the next day. Spruce Point Capital Management issued a short report on SMCI stock on Jan. 10 that prompted another 10% drop on even heavier volume than our entry (8). Did the market know the report was coming the day before? Maybe.

It's not so important to know the why behind a drop. Sometimes there's a reason, sometimes you find out the reason later. The technical action is reason enough.

Now SMCI stock may try to recover ground like it did Thursday with a 6.4% gain (9). But the recent underperformance will keep it off our lists until it has time to heal its wounds.

More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.

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