The Worst Mistake Traders Make All the Time

You’re in the kitchen. You knock the knife off the table.

As the blade begins to accelerate to the floor, what do you do? Do you put your hand out, hoping it won’t cut you?  Or, do you allow it to safely hit the floor?

Let me ask that another way. If you found a stock in the middle of a falling knife pattern, would you put your money in harms way, hoping it doesn’t destroy your account. Or would you allow the stock to safely bottom out before buying?

Far too many of us would try to catch the knife…

But even the slow-learners among us realize that’s not a good move at all.

Look at Nike (NKE) for example.

And just like that NKE gapped lower.

Unfortunately, NKE is being unfairly pared with FL at this point, even as NKE earnings have been explosive. At the end of June 2017, for example, NKE posted a beat on top and bottom line numbers. Sales were up 7% year over year with running apparel up 8%. NKE achieved top line growth among all major categories.

It may have seemed like a good buying opportunity at the time.

But to put your hand out, hoping to catch the plummeting knife would have been a bad idea. What we needed to see here was confirmation of trend change.  Sure, RSI, MACD and Williams’ %R were all in oversold territory.

However, we needed to see if the “knife” would pierce the 200-day, which it did. You would have lost money. But had you waited, opportunity arose not long after.  It found support just under the 200-day at $54.13 where it began to bounce.

Plus, W%R, RSI, and MACD were even more oversold than before.

While it’d be best to wait for a tick higher in the stock, we can at least see the knife may have stopped its plummet. It’s at this point we can reach down and begin to pick it up.

But to try to time when a knife will stop falling, mid-plummet is a terrible way to trade.

The other day, it was falling out of the sky, blade down, plummeting.  Only a fool would touch it before it showed signs of bottoming.  In August 2017, the stock only fell because Foot Locker (FL) announced weaker than expected quarterly results.  The idea is that since FL sells NKE shoes and FL same-store sales are weak it implies that NKE sales aren’t trending higher as they should be.