I thought you might find some interest in the 3 day rule as suggested by Putnid. Perhaps adding a bit more color might assist one in how it may apply to ANET. I do think that Putnid was being subtle in his message to all those who were buying (not necessarily selling) the news of ANET’s guidance shortfall.
But this rule might just be of some value for the type of stocks that are part of many of your portfolios specifically the momentum, high growth stocks. Surely we can all appreciate that if a 20% clipping can happen with a cash-positive, high quality company like ANET, it can happen to any stock.
In fact, it happened recently with another stock followed closely here that I will demonstrate momentarily. I point this out because it may be a good time to evaluate one’s response to a downturn…do you repeat the same mistakes of impulsively doing what you should not have done…reads more to find out.
The 3 day rule originated by a famous trader Martin Schwartz in his book the Pitbull in which he claimed that, in his many many years of successful trading, that stocks (and the general market) often make radical moves (up or down) in patterns of 3 days:
https://www.amazon.com/Pit-Bull-Lessons-Streets-Champion/dp/…
Putnid gave you the basics but keep in mind it wouldn’t matter which direction the move was in:
- Day 1…smartest money moves
- Day 2…less than smartest money moves
- Day 3…least smartest money moves…yes…that is you and me ;(
Essentially the theory goes that with initial radical price moves, one should not fight the trend over these first three days.
So looking at ANET…one should NOT have bought today…because we should expect 2 more down days. One would instead buy once support is seen with a spike in volume and a direction opposite from the original move.
So the theory goes, one would not consider buying ANET until or around Tuesday this coming week preferably with some support and volume in the opposite direction.
Now I think it is important to stress that these “tools” are really used by short term traders and NOT for investors…so Putnid may have been very subtly informing those buying after hours of being a…yes…that “trader” word
Please allow me to give you another recent example of the same 3 day rule…SHOP…remember Citron??
Check out this chart on go back to that day (Oct 4, 2017) it happened and count the days…those that bought in disbelief on that first day because they were “gifted that discount” were met with further down drafts over the next couple days:
https://www.barchart.com/stocks/quotes/SHOP/interactive-char…
Those who broke the 3 day rule bought too early!
Cabot had an article about this dynamic here and gives you another example in LNKD:
https://cabotwealth.com/daily/options-trading/shopify-stock-…
Now I know…you are not “traders” or “technicians” here at Sauls board…but I would argue (and I think Putnid did) that those that bought in after hours are exactly that…but fear not…its OK…you are still good people and worthy of truly the best in life…but the first step to your recovery is admitting you have a problem
So I ask, those that “couldn’t resist”, etc…did you do the same with SHOP…perhaps other stocks previously…maybe a repeat offender?? Maybe some discipline would be of value.
Perhaps it really doesn’t matter to a long term investor anyway…we all get that…but why purposely pay more than you have to if the probability is lower prices?
Another illustration might be the Crash of Feb 2018…the first big move down was Feb 5th…followed by 3 more big days down…one needed discipline to stay calm and avoid the temptation to buy on way down or capitulate on day 3-4 when selling would likely be done…statistically.
Importantly, the usual disclaimers apply that these rules are not absolute…just as is the case for financial analysis, spreadsheets, growth rates, valuations, etc.
But it is perhaps interesting to contemplate these idiosyncrasies of the market…perhaps they help some of us, perhaps not…but interesting none the less. Putnid, feel free to chime in and correct any of this.