by Serge Berger | January 21, 2014 8:23 am
Last Wednesday, Nu Skin Enterprises (NUS) — the global direct selling company of personal care products and nutritional supplements — came under severe selling pressure that caused serious technical damage to its stock chart.
The selloff in NUS stock was the result of a report published by The People’s Daily, a Chinese newspaper, in which it criticized Nu Skin for false marketing, selling non-government-approved products, using sketchy sales tactics and essentially operating a pyramid scheme. The accusations are heavy, and investors, who understand that Nu Skin’s revenue is heavily China-dependent (i.e. roughly 30%), were thus quick to hit the sell button and liquidate positions. Meanwhile, the day-trading community had a field day shorting the stock.
The panic mode continued on Thursday and Friday, which resulted in NUS stock erasing more than half of its steep 2013 rally, in just three days.
On Friday, another Chinese agency said it would investigate Nu Skin for a potential pyramid scheme, and this now has investors concerned that the Chinese government could ban direct-selling companies. Direct-selling companies were previously illegal, until the government lifted the ban in 2005.
After last week’s apocalypse, the weekly chart of NUS stock looks accordingly hideous. However, Nu Skin’s stock price rose in a vertical fashion last year, and this (through a purely technical lens) more often than not leads to above average volatility in mean-reversion moves. After it was all set and done last week, NUS stock found support at its 61.80% Fibonacci retracement level, or put differently, found its last level of support to hold. From a trading point of view, last week’s selling, and the subsequent damage to the charts, requires time for repair. Now, traders either need to take a long- or very-short-term view about approaching NUS stock.
One of the more attractive trades I see in NUS stock is the selling of put spreads, or far-out-of-the-money puts, which in essence is a bet that the stock’s volatility will die down somewhat — and, depending on the strike prices chosen in the options, also a bet that Nu Skin stock won’t fall a significant amount further in coming weeks.
The daily chart reveals that although the drop in NUS stock was severe, it did have some order to it as the 50-day (yellow), 100-day (blue) and 200-day simple moving averages (red) each acted as support, if only briefly. I point this out not because it is any solace to investors who didn’t close out their positions ahead of the selloff, but because those three moving averages can now be used as upside bounce resistance levels.
For the immediate term, Nu Skin stock first needs to find itself again, and for my part, aside from selling some far-out-of-the-money put spreads, I am watching but staying away from the stock.
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Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.
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