It turned out that technicals were indeed all I needed to follow for trading Memorial Production Partners (MEMP).
As I described in an earlier piece, I successfully navigated a trade in MEMP by closing out my position and locking out profits after a break of support at the 50-day moving average (DMA). It was purely a technical play given the fundamental story I believed told me that MEMP could and would be a long-term hold. Fast forward to July 30th and the elimination of dividends at Linn Energy (LINE) sent the Master Limited Partnership (MLP) sector reeling, including MEMP. I put aside the technical red flags waving along with the on-going breakdown and saw the selling in MEMP as overdone. I nibbled twice and paid the price.
Memorial Production Partners (MEMP) cannot escape the destruction in the oil patch. One new all-time low after another…
Source: FreeStockCharts.com
Technicians look at MEMP and immediately recognize a vicious downtrend underway. Ever since MEMP last failed to break above its 50DMA (or even 20DMA) on July 13th, the stock has been trapped in a very tight downward channel defined by the two Bollinger Bands (BBs) – see the lower light gray area in the chart above. The brief and shallow rally after MEMP confirmed the next dividend stopped cold at the top of the channel. This was a screaming invitation to short sellers, and the selling in sympathy with LINE was the confirmation. A gap down three days later delivered a quick 24% 3-day loss.
In other words, MEMP became the classic falling knife where a bottom is near impossible to predict. New all-time lows are never good; they are even worse when they come in rapid succession. Without a crystal ball, it is typically best to wait until buyers start showing up and confirm their interest by taking the stock out of its downtrend. Earnings provides another easy technical milepost: do not buy until all post-earnings losses are reversed. This gives a buy point at $9.50 and above. However, MEMP will likely still be trapped in a downtrend at that point. Aggressive buys cannot occur until that downtrend breaks.
Value investors may protest buying at higher prices. Then another approach would be to buy now and to stop out on fresh all-time lows. There is potential good news here in that buyers stepped up bigtime today (August 6, 2015) in driving MEMP off its latest all-time low with heavy buying volume. However, the fade off the highs of the day tarnished things a bit. Since I have already nibbled twice, I am content to wait until firmer signs of buying interest get confirmed.
