This is Why One Uses Trailing Stops

By Lawrence G. McMillan

Intercept Pharm (ICPT) was crushed on Thursday, falling 24 points after the FDA issued a warning on an ICPT liver drug. The stock had previously been in a negative technical pattern, having recently broken down below multiple support at 104. It had tried to rally back, but couldn’t overcome resistance. Stock volume patterns are terrible. There is resistance at 86-90.

Now it has fallen so far that it has closed the gap from January 2014 when the stock spurted from 76 to 305 in one day! The next day it traded up to nearly 500.

I have no way of knowing how many investors held on for the entire ride, but I’m betting there were quite a few. On that day almost four years ago, there was probably zero expectation that the stock could trade all the way back down to 76 again, but here it is. A simple trailing stop would have gotten you out at some point – not at the top certainly, but if you had just used the simple 20-day (not month, but day) moving average as a trailing stop, you would have gotten out somewhere just above 400. Nothing is certain. Use trailing stops or limit your risk by buying options.#

This article was originally published in the 9/22/17 edition of The Option Strategist Newsletter.