Never immediately buy the crash

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Last night I was greeted by some alerts on my phone telling me that Apple (AAPL) had plunged over 7% in after-hours trading. This was apparently due to missed earnings and poor forward guidance. The news portion didn’t interest me much because I don’t factor news or current events into my trading at all. I simply trade behavior and statistics. Behavior through trading various price patterns and also looking for certain candlestick formations (Pinbar’s FTW!) and statistics such as the edge in selling premium (implied volatility > actual volatility)

Something I have learned through both through personal experience as well as listening to veteran traders is that when price suddenly plummets it is rarely finished dropping on the first day. Going back to the AAPL event that occurred last night, the over-night price settled at around 146-147, having dropped from around 156. In case you don’t know, that is a massive one-day drop for such a large company. This isn’t a penny stock or cryptocurrency we are talking about here, but one of the largest publicly traded companies in the world

I can approach this as a trading opportunity from 3 angles: Long term buy and hold, swing trade, or selling premium via options. In each of those cases timing is important. If I am buying for long-term it is still advantageous not to buy too early. While it’s not as critical as swing trading; still nobody wants to buy a stock just to have it continue to plummet. For swing trading the timing is very critical as stop losses will be involved and timing the direction will determine a winner or loser. With premium selling, the timing is of medium impact as the premium collected will be large enough to let you be off on your timing (at least to a point). In all cases though, timing will improve the profitability and chance of success of the trade.

Back to AAPL again, we see that overnight the price had dropped into the 146-147 range. When markets opened this morning an impatient trader may have been tempted to immediately buy. If so, they would have seen there trade immediately in the red as AAPL was trading between 144 and 146 during the morning. Fear beget fear and by close AAPL was trading right at 142. In addition, price closed right at its lows of the day which doesn’t necessarily signal bullish confidence.

While there will always be exceptions to any rule, probabilistically stocks that plummet by large amounts (5-10% or more) tend to continue to drop over the next week before seeing a meaningful rebound. Of course these can be dead-cat bounces that materialize for weeks or months. I am not speaking to that, but I am speaking to that first week or two after a stock plummets, where it is often not a good idea to immediately trade the drop. Instead, practice patience and let market fear and capitulation run it’s course with a solid chance of making the trade with a better cost-basis (and perhaps even more options premium).