The collapse this morning at the open created a number of trading opportunities. In this kind of environment during a sell-off you have to decide what you want to own longer-term and what you want to trade. The collapse this morning hit Canadian Banks hard as well but while I bought some shares for a quick trade, the outlook remains negative for our banks, so the level I bought shares at this morning is not for holding but just a trade. When stocks sell-off big to start the day most times they will attempt a recovery and then either trend sideways or move lower. Sometimes the move lower is enough to warrant picking up the stock again for another trade. With Canadian stocks, trading options intraday is far more difficult than trading the stock simply because there is a lack of liquidity and the options are traded on Montreal where often bids and asks are notoriously wide apart. The market maker can see your positions and know what is happening in your trade and often it is difficult to get fills. Trading the stock though is far easier as volumes are adequate and if I am wrong on a trade in our bank stocks I usually immediately sell a one month out in the money covered call for a break-even or a very slight profit on the trade just to protect the trade and get out at some point (hopefully) over the next month. It is surprising how often I am able to not only get out of the in the money covered call BUT with a larger profit than originally expected simply due to the stock fluctuating.
BNS Stock Chart – Three Year
When stocks collapse the hardest thing to do is to risk capital in a rapidly declining market. But there are simple aspects that can assist investors in trading within collapsing stocks. One of the primary reasons that I trade in the same specific stocks is to build a firm understanding of the stock’s price movement and when a stock is undervalued, fairly valued and overvalued.
This morning I did three trades in Bank Of Nova Scotia Stock all of which were built around the confidence of knowing that if I am wrong, I can still protect my capital at risk.
One of the more important aspects of trading the same stock is the chart pattern. If you look at the three-year chart pattern, what is the chart telling you? To me, the chart is advising that BNS Stock is undervalued this morning and will bounce. If it does not bounce today, it will bounce shortly. The stock is trading at levels not seen since 2012 and yet it is generating revenue numbers far better than in 2012 and has increased its dividend from $2.28 in 2012 to $2.72 in 2015, an increase of 19.2%. Investors are panicking to get out and this is my opportunity for some trades.
BNS Stock Three-Year Chart to Aug 24 2015
Bank Of Nova Scotia Stock (BNS)
The plunge in the morning of Aug 24 saw a low of $52.60. This places the stock undervalued. The Accumulation-Distribution Indicator shows that accumulation of shares is still ongoing and in relation to the past 12 months, there have been periods such as in April of this year where accumulation was lower than in this latest collapse. That tells me that bigger investors are picking up shares this morning, which is what I did for a quick trade.
BNS Stock Aug 24 2015
Trade Details: – Stock Trade
I cannot use the Bollinger Bands Strategy Trade as the stock fell right outside the Lower Bollinger Band in the panic this morning. I therefore had to just buy with the confidence that if I was wrong I would hold the stock and sell in the money covered calls for a month out.
I bought 500 shares of BNS stock at $53.47 at $9:36. I sold for $56.00 at 10:26
Total Profit: $1255.00 after commissions.
Further Trades
The Canadian bank stocks are going to stay volatile. I will be continuing to trade in 500 share increments on what I consider to be larger dips. I tend to often check the fast stochastic indicators using the 7 and 12 periods intraday. You can see this morning another such signal came in when the stock fell back after my previous sale. At 10:35 I bought another 500 shares paying $55.58 and then selling out at 11:01 for $56.07. You need confidence that the trade will work out in your favor OR that you can protect it short-term with covered calls. You also have to believe the stock is undervalued. For BNS Stock, that is definitely the case with the stock trade below $56.00. The second trade returned $235.00 after commissions.
BNS Stock trade 2
BNS Stock – Third Trade
A third trade was even better shortly after the second trade ended. Again using the same indicators and believing the stock is undervalued, the stock fell back after my selling the shares a second time. I watched the stock fall and then turn sideways. The fast stochastic indicators were oversold and showing the stock might want to move back higher. I bought 500 shares ay 11:34 for $55.;60 and shortly after sold these shares for $56.50. At the time of selling the shares you can see that the Fast Stochastic was overbought and the stock was trending sideways. Any time after my sell would have worked as well. This trade returned $440.00 after commissions.
BNS Stock Third Trade Aug 24 2015
Keys To The Trade
The biggest key to the trade is believing the stock is undervalued below $56.00. This is what gives me the confidence to buy the shares. I also have confidence that if I am wrong and the stock moves lower than my entry point I can either afford a small loss and get out quickly, perhaps for 20 cents lower than my entry point, OR I can sell in the money covered calls and hold the stock longer, confident that it is undervalued and at some point it will recover.
This morning there were a lot of trades like this and there will be more shortly. Manulife Financial fell below $20.00. Bank of Montreal fell below $67. Those are just two examples of other similar trades that could be done.
Having an understanding of what constitutes a stock being undervalued goes a long way toward profiting from a collapse such as we saw this morning.
Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk. Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed and presented are financial or trading advice or recommendations. Everything presented and discussed are the author’s own trade ideas and opinions which the author may or may not enter into. The author assumes no liability for topics, ideas, errors, omissions, content and external links and trades done or not done. The author may or may not enter the trades mentioned. Some positions in mentioned stocks may already be held or are being adjusted.