ANET and the 3 Day Rule

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:

  1. Day 1…smartest money moves
  2. Day 2…less than smartest money moves
  3. 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 :wink:

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 :wink:

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.

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Thanks for the posting. While I’m not much of a trader I was one of the guilty ones who bought after hours. It was just a few shares and more for seeing how it works, having never traded that way before. I’ll repent and go back to more sedate follower of the markets.

I have a different feeling. I feel that the pre-market or after-market can often be wrong immediately after earnings reports (reduced liquidity). And if I read what the news is and feel it’s something positive, and the market reacts negatively (which it sometimes does), I don’t hesitate to make a small addition to my position in the after-markets. It usually works out well, and the market closes the regular session up, following the import of the news. I see nothing wrong in taking advantage of a favorable price outside the regular session.

Saul

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Since markets are closed Monday for Presidents Day would ‘day 3’ move to Wednesday?

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Since markets are closed Monday for Presidents Day would ‘day 3’ move to Wednesday?
Looks like that very well may have come to roost.

I thought that the weekend would provide time for folks to dig deeper, but I guess there are enough “followers/lemmings” that don’t do their own analysis that are invested…which gives us here on the board a decided advantage.

Looks like duma’s post in this thread and putnid’s pointing out of the 3-day rule has shown to be proven true to this point of today. Arista’s low price on the day is just a bit above $241/share.

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Arista’s low price on the day is just a bit above $241/share

Already out of date before I could hit the submit button.

Thanks for the heads up.

Grabbed some at 239.50.

Still falling though. If we get a close much below 240, the support is broken and there will be a shot of getting some at 200 ish.

Cheers
Qazulight (Almost guaranteed 200 ish because I bought)

Thanks for the heads up.

Grabbed some at 239.50.

Still falling though. If we get a close much below 240, the support is broken and there will be a shot of getting some at 200 ish.

Looks like it bounced up from $238. I am not a technicals guy, but looks like that might have been related to being near the bottom of a Bollinger band or some such.

At a share price of $243, market cap is $17.77B, with net cash of about $1.5B, that’s basically $16.3B for EV. For a estimated forward FCF of say $750M, current EV/forward FCF would be ~21.7.

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If the share price dropped down to $200/share, enterprise value would be down to $13.1B and EV/Forward FCF would be about 17.5 (assuming the same $750M forward twelve months FCF).

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if it drops to $200, that would still be up 33% from late May 2017, and about 67% from about a year ago. May just be retracing gains that came too quickly and/or folks are taking profits and stop losses are kicking in.

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The rationale behind The Three-Day Rule is that if a large hedge fund or institution owns millions of shares of a stock, it won’t be able to sell out of its entire position in a day or two without causing the stock to fall.

that might be followed up with the observation that after 3 days the recovery is usually tepid, you may not miss much by waiting a while longer . Because I suspect it often takes a lot longer than 3 days for institutions to unload . In some cases they are selling just so the stock won’t show up on their next quarter list of holdings .

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Thanks for the heads up.

Grabbed some at 239.50.

Still falling though. If we get a close much below 240, the support is broken and there will be a shot of getting some at 200 ish.

Cheers
Qazulight (Almost guaranteed 200 ish because I bought)

Just added at $236.90 myself. I guess I’m impatient. But I can see this bouncing up quickly and strongly given its valuation. If it gets back to around 200, I will probably add again.

Dave

if it drops to $200, that would still be up 33% from late May 2017, and about 67% from about a year ago

This is what is called anchoring.

Chris

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if it drops to $200, that would still be up 33% from late May 2017, and about 67% from about a year ago

This is what is called anchoring.

Chris,

You are correct of course.

The only reason I brought up the technicals is that the fundamentals as this board interprets them has not changed that much.

As such 20 percent price cut it a technical move. There will be no more fundamental moves for a while. Because of this the traders, or algorithms, are moving the price. If I did not have a full position I would throw out a low ball bid at 195 or so. I am a small enough player I
might catch it after hours.

Cheers
Qazulight

"I would throw out a low ball bid at 195 or so. I am a small enough player I
might catch it after hours.

Cheers
Qazulight"

You may want to check with your broker. Normally buy or sell limit orders set during the trading day are not filled pre or post market unless you initiate them during those times and are able to trades pre or post market.

Rob

From last Wednesday (2/21/2018) at just a bit before 11:30 am.

Looks like it bounced up from $238. I am not a technicals guy, but looks like that might have been related to being near the bottom of a Bollinger band or some such.

At a share price of $243, market cap is $17.77B, with net cash of about $1.5B, that’s basically $16.3B for EV. For a estimated forward FCF of say $750M, current EV/forward FCF would be ~21.7.

Now a week and a few hours later, ANET has recovered up to around $273/share.
I hope nobody was legitimately waiting and hoping for a drop to $200.

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I grabbed mine at 239 and it kept falling. I had some ‘splainin to do. But I did the ‘splainin and now have a nice profit showing.

I mentioned the 200 support, but it never really got enough below 240 at the close to really break down.

Saul has taught me that if it is a good deal, buy it. Hanging for the best deal
will leave you hanging out.

Cheers
Qazulight

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Saul has taught me that if it is a good deal, buy it. Hanging for the best deal
will leave you hanging out.

Or, another quote on not chasing a specific price:

“Better to get a great company at a fair price, than a fair company at a great price”

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<<<Now a week and a few hours later, ANET has recovered up to around $273/share.
I hope nobody was legitimately waiting and hoping for a drop to $200.>>>

Is it really? I had not bothered to even look. Just put in an order to buy some more the other day at whatever price it was.

Well good show then ANET! I will take a look again in a few weeks. Refreshing way of life to be a bit more hands off. Leaves other things to provide the stress that we all crave to exist in our lives.

Tinker

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Regarding ANET, for those with the proper Motley Fool subscription.
http://bit.ly/2t8tuUh

Reply over there if it is directly relating to the contents of that post, but I figured several here would be interested to note my observation.

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