Over the last few weeks, most folks have had their fill of hearing about Chipotle Mexican Grill (CMG) or don't have any energy left to read about Kinder Morgan (KMI), but there are technical lessons to be taken from both of these charts.
Bottoms are only evident in hindsight, which makes them difficult to catch. In a completely pitch black room, you don't know where the wall is until you run into it. Well, it's kind of the same way with bottoms, but there are some trading strategies you can try on names like these that don't involve groping around a room in the dark, hoping you don't break your nose running into a wall.
CMG is a good chart to cover, because of the multiple big moves lower over the past two months.
First, the good news: this isn't a complicated approach. Now, the bad news: they won't all work this easily, and require strict discipline. So here are the rules as I see them.
Don't buy the first big down day. Yes, a stock may reverse big, like CMG did on Dec. 7; how do we know it will be the last big down day? KMI will give us a better example of that result.
Wait for a close above the prior day's low. While I would prefer for the entire follow-up day to have a higher low, as long as we close above the prior day's low, I'll take an interest in the name.
Buy the next day open as long as it is higher than the prior day. Pretty simple.
Set a hard stop at the low of the previous two days. No excuses. If the low fails to hold, then it is time to bail.
Bonus: if you see the Relative Strength Index (RSI) or Commodity Channel Index (CCI) exiting oversold territory, I would give more weight to the potential of the bounce.
This is where the chart of KMI is handy.
Note how the stock started its big descent on Dec. 1. None of the conditions for a bottom reversal trade existed until the Dec. 7 - Dec. 8 timeframe. The lows of the two days were virtually the same, and the stock did close well off the low on Dec. 8. We then saw a green open on Dec. 9.
It did not get the oversold exit on the CCI or RSI, but it was there on the Ultimate Oscillator. While not ideal, this setup may be enough for some traders. It really comes down to risk appetite, but there was at least enough to consider it.
The bounce trade is done here, and other than a few CMG ratio put spreads, I didn't try on either name, so this isn't meant to be a victory lap as I have nothing to celebrate.
Instead, these two charts offer up a potential roadmap/trade thesis for those looking to trade the falling knives without trying to catch the bottom.