Anatomy of a Great Trade: ARM’s IPO Disappoints. But That’s Not How We Play IPOs.

by | Sep 22, 2023

The IPO market has been in the news lately as ARM has captivated the trading world.

It’s hugely popular and carries a big valuation.

So everyone’s watching.

How has it done?

Not good.

A bunch of excitement followed by a big letdown.

Which is typical when IPOs first come out.

Which is why we don’t trade IPOs this way.

We wait many months until the 12-month simple moving average (SMA) finally shows up on our chart. Then we wait for two consecutive closes above the SMA. Then we get out when price crosses back down below the SMA. 

Does this work?

Here’s how it worked on META, then known as Facebook:

First, there was excitement. (We weren’t involved.)

Then price fell off a cliff. (We didn’t care.)

Then everyone forgot about it. (We didn’t.)

Then it took off after the SMA showed up and there were two consecutive closes above it. (We would’ve entered in August 2013 at $37.30 and would have ridden it until January 2017, where we would’ve exited at $116.)

By waiting, we could have missed all the initial angst and still had a 200% winning trade. 

The IPO market will pick up again once the Bear Market finally and truly turns into a Bull Market.

But there’s no need to rush into anything.

We can catch big moves on new companies.

If we take a long-term perspective.

Happy trading,

— Scott Welsh

P.S. As a reminder, these plays are based on my longer-term Weinstein Stage Analysis method. The charts above use monthly candles and a 12 month simple moving average. For details on this method, see my explanation on this Ask The Pros episode starting at timestamp 20:45.

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