Today's strong move in the software sector and other stocks I've been following like Citrix Systems (NASDAQ:CTXS) has put some money in subscribers pockets, but one stock I thought might really surge isn't. That has me posing the question "why?" and is the process I think every good trader should ask when a stock doesn't act like they think it should.
The past week, we have been talking about a powerful supply/demand situation for shares of Rational Software (NASDAQ:RATL) should the stock trade $29. Today the stock traded $29 and did move to a high of $29.88, but has since been sitting at the $29.25 level and volume has been light. This had me wondering why? So, I put to task my retracement technique of looking at the stock through the eyes of a market maker and perhaps I've found my answer as to why the stock isn't moving higher. This is a technique I started teaching back in October of last year that I call "fitting" retracement. If we believe that market makers just trade levels, then perhaps we've sniffed out a potential problem and should let things develop further and look for a lower price for a bullish trade.
Rational Software - last 5-months
This technique of "fitting" served me well when stocks were falling apart and trading new 52-week lows. While the point/figure chart gave a powerful "buy signal" today at $29, I get the feeling that there may be a market maker or two that is sitting right near current levels getting rid of inventory. If I were a market maker and stepped up to the plate back in April in the $12.50-$16 range with the belief that RATL was a low risk high return trade and built a 5,000,000 share inventory in the stock, perhaps the market maker defined a range from $12.56 to $30 that he/she would trade their inventory. By anchoring the retracement bracket at the low of $12.56 and then fitting the 38.2% retracement level at the May 14th low of $19.20 (the stock reversed a decline for some reason at $19.20, and I think market makers became buyers at that retracement level). Market makers trade levels and now it sure looks like the recent reversal to today's session high did come right near the 61.8% level of $23.30. Shares of RATL might be trading in the upper end of a range right now and has me turning more cautious toward the stock.
If I were a trader that had bought July call options today, I'd be rethinking that trade right now. I'd be at least open to question or asking myself... "what if the stock pulls back to $23.30?" While I really like what I see from the supply/demand chart, the above bar chart gives hint that the stock really needs to get above $30 and get out of this retracement bracket range for me to really be bullish on the stock. We might expect the stock to now range trade for awhile until a couple of things happen. One would be an extremely bullish market where the market maker simply says... "this market is just to strong to continue selling this stock at $29, I'll back off the offer and let the stock move higher and get rid of inventory at a higher level." The other thing that can happen is that a big buyer(s) comes into the stock. But, we can see from today's volume that this isn't the case right now and the market maker that bought inventory from $12.65 to $16 and even some at $23 is content to just sit the offer at current levels and make a nice profit. Right now, a bullish long in RATL wants to see volume! Until the stock gets some volume, I think there might be better opportunities for our money.
Do you have a stock somewhere in your portfolio that isn't moving like you think it should be? Try the above technique and you might just find your answer!
Aha!... but now you know what to look for!
Remember that CTXS trade that has appeared in the commentary lately? Check this out. I'm going to use the exact technique as shown above on CTXS. I'm anchoring to the bottom and "fitting" the 38.2% retracement to the first pullback. This will blow your mind, and may actually give hint to how bullish things could get for RATL. We're using "domino theory" here, but I find it exciting!
Citrix Systems Chart - last five months.
The same supply/demand characteristics in CTXS are what led us to think that RATL was looking bullish. Now look at the retracement bracket on CTXS using the "fit" technique. If you like to trade the domino theory that bullishness rolls from stock to stock in the same sector, then perhaps we're on to something big in shares of RATL, but it needs to get above its retracement range like CTXS did just recently!