How to Catch a Falling Knife

$FU is a Chinese, low float momentum name that went from $4.50 to $11.50 in two weeks. On Thursday, the stock finally showed some weakness due to some news. We shorted the stock on 09/26/13 at $10.55 as it broke the uptrend line and cover our shares at $9’s. The stock continued to go down pre market on Friday with a low in the $6.90 area. We had some regret about not holding some of our short position overnight. However, the market always provides new opportunities, so don’t fret if you missed one.

Friday morning, 09/27/2013, I was stalking $FU for a trading opportunity since the stock went from a Thursday high of $11.50 to a Friday pre market low of $6.90, that a 40% loss in one day! It was oversold, so I was watching for a bounce on the stock sometime soon. When it comes to catching a falling knife stock like $FU, You have to wait for the best setup; you must have patience. You cannot buy just because it went down 40% – it could lose another 60% as well and become a penny stock. Key is to wait for a setup that is low risk and highly rewarding.

Lets see how $FU set itself up on Friday as a bounce play.

The chart above is a Friday intraday chart. As you can see, the pre market low was $6.90, so that number will be one of our reference price point. $FU opens at $7.46 and quickly pulls back as stuck longs from Thursday sell in panic and shorts cover their shares with hefty gains. It pulled back to that pre market low price of $6.90 and found some support, as the candle stick implies. At that point, buyers showed up thinking that the pre market low might hold, if not the loss will be minimal. So I bought the stock at $7.05 with stop on that $6.90. The stock never looked back and proceeded to bounce all the way to an $8.59 high! We sold our final shares at $8.15, a 15.5% gainer with 2% risk.