Zooming in, zooming out

  • SEDG rallied more than 7% intraday on Tuesday
  • Move followed Monday’s inside day pattern
  • Stock recently tested two-year support level

Trading and investing may be distinct disciplines, but traders who focus only on the short term run the risk of overlooking potentially important market signals.

For example, SolarEdge Technologies’ (SEDG) roughly 45% sell-off since early August is one example of the downturn in the clean energy space that has prompted some analysts, including those at Morgan Stanley & Co., to describe the sector’s move as overdone.1

Many traders also likely noticed that SEDG’s sell-off recently dropped shares into a support zone (roughly $190–$210) that prices have rallied off four other times over the past two years:

Chart 1: SolarEdge Technologies (SEDG), 3/25/19–10/18/22 (weekly). SolarEdge Technologies (SEDG) price chart. Long-term support zone.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

As of yesterday, SEDG was up more than 7% for the week, thanks mostly to a big rally one day after the stock appeared on the Live Action scan for inside bars:

Chart 2: LiveAction scan: Inside bar. Higher low and lower high.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

An inside bar (in this case, an inside day) is simply a price bar that trades entirely within the range of the preceding bar—i.e., it has a higher low and lower high than the previous bar. A common interpretation of inside days is that they represent a volatility contraction or “pause” that can sometimes be followed by a volatility uptick. Tuesday’s price action, when SEDG jumped more than 7% intraday, appeared to fall into that category:

Chart 3: SolarEdge Technologies (SEDG), 10/11/22–10/18/22. SolarEdge Technologies (SEDG) price chart. Rallied after inside day.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

But SEDG’s price action after other inside days suggests moves like yesterday’s may be more the exception than the rule. While the stock was more likely to rally the day after an inside day (52.6% of the time vs. 50.6%), its average one-day return after inside days was smaller than its overall average one-day return (0.14% vs. 0.2%).2

In addition to understanding the dangers of attaching too much significance to a single day, longtime traders know the importance of putting any short-term price action into context. For example, what kind of price action preceded the inside day—a rally, a down move? Also, did the inside day close above or below the opening price (or above or below the previous close)?

Just one example of the difference such context can make: SEDG inside days that (like Monday) occurred within three days of the stock making its lowest close in at least two weeks were followed by up days 57.4% of the time, with an average gain of 0.4%—a much more bullish result than the overall inside-day performance.

Aside from the tendency for short-term patterns to have short-term implications, experienced traders are also careful to remember that those implications can vary depending on the larger market context.

Market Mover Update: Traders who “sold volatility” in Papa John’s (PZZA) in early October may have  fared better than those who bought it (see “Finding the options that matter”). The October $75 options straddle has lost more than 40% of its value since October 5.

Today’s numbers include (all times ET): Mortgage Applications (7 a.m.), Housing Starts and Permits (8:30 a.m.), EIA Petroleum Status Report (10:30 a.m.), Beige Book (2 p.m.).

Today’s earnings include: Tesla (TSLA), WD-40 (WDFC), ASML (ASML), Abbott Laboratories (ABT), Lithia Motors (LAD), Procter & Gamble (PG), Knight–Swift Transportation (KNX).


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1 CNBC.com. Morgan Stanley says 30% sell-off in ‘clean tech’ is overdone, predicts one stock could triple. 10/14/22.
2 All figures derived from SolarEdge Technologies (SEDG) daily price data, 3/26/15–10/18/22 (251 inside days total). Supporting document available upon request.

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