Trader’s Narrative

Although I was early, my skepticism about the growth story of Crocs (CROX) turned out to be right on the money.

The dream turned into a nightmare for the longs with an almost 40% gap down on November 1st 2007. Although it would have been very painful, the best option - in hindsight - would have been to sell right there and then.

That’s because when Wall St. turns on a one time growth darling… it can get very ugly.

Double Whammy
For one, no growth investor or swing trader wants to ride along with management when they were either blindsided by a slowdown or saw it coming and were coy and didn’t communicate it in advance.

As well, declining sales/growth reduces the valuation of a company. And it has the levered effect of also reducing the multiple used to value it: the price earnings ratio. So the company is hit with a double whammy.

Very few are able to recover from this. That’s why it is dangerous to fall in love with a stock, no matter how persuasive the arguments. A stock is a stock is a stock.

But with Crocs, I was a bit puzzled at how people could actually could like them, never mind love them (as a product or a stock). In any case, now that the whole sorry saga has played out, here’s the chart:

Other than the obvious line break (blue) that spelled the end of the run, it is interesting that each gap down was below the previous swing low. What more obvious sign that buyers were simply not showing up?

In other words, in each subsequent price realignment, it missed previously established support levels. Until finally, it is now trading below the first double bottom in 2006.

It is safe to say almost all longs are now underwater and unhappy. Which means that if a miracle delivers a rally, they will be so relieved to be able to get out with any semblance of break even, it will be a short lived rally.

Other than running away from former growth stock darlings, Crocs has other useful lessons. Study the first few months of CROX and notice how it built a base from which it launched a massive run. It almost looks like two back to back cup and handle formations. Now go and find stocks which have similar bases. IPOs are great candidates for growth but they are few and far in between these days.

I suggested yesterday that the overnight and pre-market range would be a good market tell for what we had in store today.

I really meant what the market would do after it had set this range. The classic interpretation is that if it breaks down, a lot of people would be disappointed and in a loss, increasing the chance of another cascade down.

But on the other hand, if it breaks above the range, it would also set the precedent for the coming trading day and we would close the gap.

Which is exactly what happened:

As you can see, the range was quite tight. It broke down to 1255 but after several attempts didn’t break down any further. In the morning we had a spike up and in a furiously fast market we raced up. There’s something magnetic about gaps - they are almost always filled in.

The tell was clear but you still needed some nimble fingers (or preset conditional orders) to be able to get in and out.

As the name suggest, Ascent Solar is in the burgeoning solar power sector and today it lighted up just about any sort of filter set for gaps or unusual volume or high trade count. By luck, ASTI was featured as one of the movers and shakers in the daily email I get from QCharts (at around 11 am). The news which propelled it to almost double from its close yesterday was a strategic aquisition of a good chunk of their shares by Norsk Hydro.

Things were ho-hum until the sixth candle which took price back up to the opening range high. The next two candlesticks were consecutively narrower in range, while remaining just below the opening range high (green circle). As price contracted, so did volume (green box).

Finally price broke up above the inside candle’s high (and the opening range high). It continued in an almost uninterrupted rise to reach almost $9 and close just under its high of the day. The combination of narrow range candles and a strong, enduring trend produced around an +8R. All in all, a textbook setup and trade.