Over the past few months we’ve had a few long trades that couldn’t maintain their momentum on the Twitter and/or StockTwits streams. As a result, we closed them quickly with small losses or gains. The rational for closing a trade that hadn’t deteriorated in price, but was losing momentum on social media is simple.
The reason to make the trade is that we believe our social media momentum indicators catch the herding effect in the market. They trend higher or lower with the movement of the herd so when bearish momentum is overwhelmed with bullish momentum a long trade is signaled. Our expectation for long trades is continued strength in our momentum indicators as more of the herd turns bullish (and of course this should be associated with a rise in price for the stock).
We close long trades when it appears the herd is turning bearish on the stock again even if price hasn’t confirmed the lack of support yet. Exercising discipline keeps the losses small and frees up cash for better opportunities. With that in mind let’s take a look at what’s happened since we closed the trades.
First is Starbucks (SBUX) that had a long signal from 8/8/14 to 8/15/14.
Next is the Gold Miner’s ETF (GDX) which had a long signal from 8/4/14 to 8/22/14.
The moral to the story is when momentum on social media changes trend it is likely that the stock is soon to follow…so stay disciplined in your trades and close them if other traders on Twitter and StockTwits stop supporting the stock.