How to trade fast-moving stocks like the fuel cell makers …
• Ensure risk management is in place
• Reduce position size
• Give stocks time to consolidate big moves
In any asset class, whether it be stocks, bonds, currencies or commodities, there is a constant ebb and flow of money rotating in and out of different areas. In currencies the focus on any given day, week, month or quarter may move from the EURUSD to the USDJPY. However, in commodities, oil might be all the rage one week while coffee makes the headlines the next week. The trick of the trade is to a) understand this game and b) respect it.
In the world of equities, the usual rotation from sector to sector and industry group to industry group is one part, the other is the constant competition over what is becoming the next hot group, whether that means sizeable, choppy moves or becoming a trend follower’s dream.
Early last week, a few select stocks that are in the business of fuel cell manufacturing came on the scene. These manufacturers of a rather green energy source quickly became all the rage when Tesla Motors (TSLA:xnas) discussed that it would go into the battery business. At the same time Walmart (WMT:xnys) signed a big deal with Plug Power (PLUG:xnas), one of the fuel cell manufacturers.
The rest is history, and the three companies in focus are Plug Power (PLUG:xnas), FuelCell Energy (FCEL:xnas) and Ballard Power (BLDP:xnas).
I first pointed to this group of stocks on Monday, March 10 when I discussed the major long-term breakouts that each of them accomplished over the past couple of weeks with this new-found attention. While in full disclosure, the upside target at USD 10.00 that I discussed on Monday for Plug Power (PLUG:xnas) has been reached. All three stocks have since corrected in a big way and traded in 10 to 40 percent daily swings throughout this week.
As headlines are still surrounding these fuel cell manufacturers, the question is: how does one trade stocks exhibiting such volatility? The answers are below:
Ensure strict risk management in place
First off, let’s note that all three stocks last week broke out of multi-year basing patterns, which, through a strictly technical lens, is bullish. Equally important to realise, however, is that the breakouts were strong. So much so that any of these names can easily fall another 50 percent just to stage a classic re-test of their breakout areas. In the case of Plug Power (PLUG:xnas), from a multi-week/month view, this could mean the stock re-tests the USD 4.00 area before it can stage a better move past the USD 8.00 – USD 10.00 range. As such, in percentage terms, these are massive moves we are talking about, and the only way to trade stocks like these is by starting off with two crucial risk management rules: reduced size, widened stops.
In other words, a stock that on any given day can move 10 percent needs to be traded in a lesser size but with wider stops than a stock that mostly only trades with 2 percent daily swings. That’s risk management basics but they really only apply to big moving stocks like the fuel call companies.
Source: Saxo Bank
Now that the fuel cell stocks have staged big moves and major technical breakouts, it is time to let them settle, define a trading range (however wide), and let the moving averages catch up with price. This applies to any group of stocks that suddenly pops on the scene, just like it applied to Facebook and its cohorts in the second half of last year, as well as to Tesla Motors.
Taking the example from FuelCell Energy (FCEL:xnas), note that both its 50 and 100-day moving averages are well below the current price. Let some of those moving averages catch up with price, which could then build better levels of support. For more near-term moving averages, I like to use 8 and 21-day ones.
In summary
1. Reduce position size.
2. Widen stops.
3. Give the stocks time to consolidate big moves and allow moving averages to catch up with price.
Source: Saxo Bank
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How to trade fast-moving stocks like the fuel cell makers …
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