OVERVIEW: We recently highlighted TEVA as a long candidate but initially passed on the trade as it gapped up over 7% this last Monday extending itself above the buy point of the technical pattern the stock had carved out over the last several months. We had been looking, and hoping for, a bit of a pullback this week before considering putting a position on, but after a tight range on Tuesday that saw the stock close near unchanged, the stock again gapped up on Wednesday after news came out that Warren Buffet has a new position in the stock and it has continued higher since. Although it is difficult to watch a trade you have been lining up take off without you, I have come to be able to shake this type of thing off a bit easier than I had been able to in the past. We, as human beings, can have a selective memory when it comes to things of this nature. We seem to forget the trades that we passed on that ultimately went in the opposite direction which would have netted a losing trade for our account and only remember the ones that advanced without us. Many trades will come across our screens that for some reason or another we will not take part in, but like they say, you can’t kiss all the women, unless your Bill Clinton, of course. So with that in mind, let’s see what happened with Teva Pharma and how we can deal with these gap situations in the future. Here is the current chart showing the gap out of the triangle pattern shortly after a bullish moving average crossover, as well as the second gap higher two days later.
As we pan out and look at the longer term chart below we can see the stock made nearly an 18 year low in the tail end of 2017. From there the stock began a fierce recovery that saw the stock price double in less than three months. Since then the stock had formed a constructive looking five month base and ascending triangle pattern. In early May the stock caught our attention again when the 50 day MA crossed back up over the 200 day moving average and price started to press up against the top of the triangle. Unfortunately, the stock gapped higher out of the pattern adding an element of risk to the trade that we weren’t counting on initially. Why? Because now we must decide whether to buy the gap, which will likely result in us having to widen our stop beyond where we normally would have with this pattern, or accept the higher risk of being taken out of the trade prematurely with a tighter stop that would likely be taken out on a normal pullback. A third choice was to pass on the trade, which we did, hoping for a near term pullback. As traders we will be faced with these type of situations from time to time. We certainly would not have been “wrong” to take the trade on the gap day provided the gap wasn’t extreme and trade still fit into our risk/reward profile, in our case we just simply opted to wait for a pullback, which we often like to do, and unfortunately that did not materialize. From here it is important for traders to keep this stock on their watch list as it may set up for another trade on a qualifying pullback, or future breakout pattern. Often traders can get so frustrated in missing out on a trade in a certain name they cast the stock aside and forget about it causing them to miss on a possible future opportunity, in this case the chart shows a pause is possible near $22.70, this price marks the high posted in January of 2018 which ultimately led to the five month correction in the stock, so perhaps this area presents an opportunity for the stock to set up again, we shall see. And always remember in regards to opportunities you think have passed you by, it is always better to be on the pier wishing you were on the boat, then to be on the boat wishing you were on the pier.
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