A Stock That's All Powered Up

08/07/2013 7:00 am EST

Focus: STOCKS

Joseph Fahmy

Managing Director, Zor Capital, LLC

Just like Tesla Motors, the other company helmed by high-profile entrepreneur, Elon Musk, this company’s stock has exhibited strong price action, which is why Joe Fahmy of JoeFahmy.com likes trading it.

I’ve been trading Solar City (SCTY) since about $12. It formed a rare, strong technical pattern off its IPO, which resulted in an explosive breakout from $20 to $50 in five weeks! Since then, it has consolidated nicely and continues to show great price action.

If you look at its weekly chart (shown below), you will notice that all the big volume is coming on the “up” weeks, and the “down” weeks are on lower volume. This is a strong sign in my view. Its recent consolidation has occurred on three weeks of tight, low volume, which gives me the feel that the stock is being absorbed by the institutions and wants to move higher.

chart
Click to Enlarge

In interest of full disclosure, I currently own a position for my clients. I’m sure some of the objections to owning this stock will be:

  1. They have no earnings

  2. This stock is too speculative, and

  3. How do I trade this when they have an earnings report coming out Wednesday, August 7, after the market close?

My first response is: YOU DON’T HAVE TO TRADE THE STOCK! As I always say, do what works for you! I am simply writing this post to show you some insights and reasoning behind why I take certain positions. Again, please don’t trade the stock if you’re not comfortable with it.

Now, going back to the objections…

1) Earnings don’t matter as much to me when I’m dealing with newer entrepreneurial companies that are establishing themselves for the future (other examples include Amazon and Zillow)

2) ALL STOCKS ARE SPECULATIVE! Remember when we thought GE, Enron, and Worldcom were safe?

3) For now, I am planning to hold a position over the earnings release, but it will be a position that I can accept a downside loss and not have it damage the portfolio. For example, when growth stocks report bad earnings, they usually gap down about 8-12%. Some drop as much as 20%. Because I am always thinking defense, I will hold a position that won’t damage the portfolio in case it gaps down 20%. For example, if you have a $100,000 account, you can take a 2.5% position ($2,500), so in case it drops 20%, you only lose 0.5% of your capital ($500). Hopefully, this makes sense.

Again, everyone trades differently and everyone has different investment objectives, so please don’t take a position if you are just looking to gamble over the earnings. To me, this is a stock that I am taking a calculated risk with, mostly based on the strong price action. In addition, I like SCTY longer-term, and I think it will see new highs before the end of the year. One last point, never bet against brilliant entrepreneurs like Elon Musk.

By Joe Fahmy, Trader and Blogger, JoeFahmy.com

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