In early July, I mentioned a stock on my blog called Acacia Communications (Symbol: ACIA). I bought it for my clients and the stock has more than doubled since then. I received many emails asking me what I saw in the stock, so here is the anatomy of my trade:
1) (see chart) ACIA came public in a very tough market for IPOs. There has been a substantial decrease in IPOs this year, so the underwriters priced the stock VERY conservatively to make sure the IPO would be a success.
2) After pricing the IPO at $23, the stock doubled to $46 in a very short period of time. I hadn’t purchased it yet, but it showed up on my radar because I screen the market every night looking for strong fundamental and technical stocks.
3) Over the next 3 weeks, the stock formed a rare technical pattern called a “high, tight flag.” I recommend reading more about this pattern in William O’Neil’s book: How To Make Money In Stocks. The pattern is both rare and risky, but stocks can skyrocket off this formation.
4) After the Brexit vote in late June, the stock recovered quickly and I bought a 4% position for clients around $38. When it started moving in my favor, I increased it to 12% just below $40. The reason for this aggressive position was the technical formation, the explosive earnings and sales growth, and the way I got filled in the stock. This is a subtle nuance in tape reading. When I find it difficult to get filled near a pivot point, it tells me there is strong demand for the stock. Also, keep in mind if the stock turned against me, I would have cut the added position quickly to preserve capital.
5) The stock broke out and I sold 1/3 of the position at $52.50 (tweeted on 7/14). I sold another 1/3 at $58 (tweeted on 7/18) leaving me with my original 4% position. When the stock wouldn’t correct and acted very strong technically, I bought back the additional 4% position around $60 and have held an 8% position since.
PLEASE KEEP THIS IN MIND: I had conviction to take this position for a larger than normal gain because of the many strong factors that came together. Kind of like the “Perfect Storm” of setups. I also trade TONS of stocks where I take losses, but I try to contain these losses to 3-7%. Once in a while, you need a nice +20%, +50% or more winner to offset many small losses. Also, keep in mind that I can sell this stock at anytime. That’s why it is IMPOSSIBLE for me to give REAL-TIME trades on Twitter because I don’t know anyone’s timeframe, risk tolerance, or financial objectives. I share ideas for idea generation and it is understood that if you trade them, you will have a stop loss in place based on your OWN trading philosophy.
6) After the close on Thursday (8/11), ACIA reported blowout earnings. Going forward, I have different sell targets for my remaining position, but again, it makes no sense to post them because everyone has different timeframes. Do I recommend chasing the stock on the likely gap up Friday morning? OF COURSE NOT! I am simply explaining the reasoning behind this trade so hopefully these factors might help you in the future.
7) One last point, we are in an environment where earnings and sales growth is rare. As you can see on the bottom of the MarketSmith chart, ACIA has explosive accelerating growth and the stock is being rewarded for it. My point is: When people tell you we’re in an “earnings recession,” it is NOT every sector. There are plenty of great companies with strong growth, you just have to put in the work to find them! Good luck trading!
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