There’s a difference between buying bad companies in a downtrend and good companies on a pullback! It is being able to distinguish between these types of nuances that separate good traders from bad. 

CHEWY INC (CHWY) was a phenomenal stock running from under $25 to $110, until it gave up all of its gains for the previous 12 months. 

However,  when you’ve got high growth, momentum, and market favorite stocks like CHWY, these are the type of stocks I want to buy on dips. I look for pullbacks in strong momentum stocks and wait until they form a base. 

This trade idea worked perfectly. Unfortunately, I didn’t get filled on my buy order and missed the boat. However, the lessons and reasoning behind this trade idea are invaluable.

Fundamentals

Chewy, Inc., (CHWY) together with its subsidiaries, engages in the pure-play e-commerce business in the United States. The company provides pet food and treats, pet supplies and pet medications, and other pet-health products, as well as pet services for dogs, cats, fish, birds, small pets, horses, and reptiles through its chewy.com retail Website, as well as its mobile applications.

CHWY’s revenue and earnings have been growing steadily, as can be seen in the chart above. However,  CHWY topped out in February, as did a lot of the other mid-cap stocks. An earnings miss in September set the stage for CHWY to give up a year’s worth of gains. 

Chewy (CHWY) reported a 2nd Quarter July 2021 loss of $0.04 per share on revenue of $2.2 billion. The consensus estimate was a loss of $0.02 per share on revenue of $2.2 billion. Revenue grew 26.8% on a year-over-year basis.

The company said in its shareholder’s letter it expects third quarter revenue of $2.20 billion to $2.22 billion and continues to expect fiscal year revenue of $8.90 billion to $9.00 billion. The current consensus revenue estimate is $2.25 billion for the quarter ending October 31, 2021, and revenue of $9.19 billion for the year ending January 31, 2022.

It is this miss on full-year revenue guidance and miss on 2nd quarter earnings which sent the stock down 30% over the following couple of months post the earnings report.

In my opinion, CHWY is a great company. Some bad earnings brought the price of the stock down. Making the most of bad news is how you can get stocks at a discount.  

A stock needs to have bad market sentiment if you want to get discounts on stocks you want to own! That’s the game. 

This earnings miss was a small misstep in the long-term health of this company. It was the technical levels that really had me liking the trade setups. The earnings weren’t awful, and I believed with this down move, the bad news had already priced into the stock.

Technicals

$60 was a support level on the daily from last year. This is where the stock launched from 60 to 120.  I never want to try to catch a falling knife. I need to see signs of consolidation at a major daily support level. And even then, I put in a tight stop because these types of stocks can go much lower if support breaks.

CHWY started to find a base above the low $60 support level that it had been building for a few weeks now. I might have been a little bit early, but I  thought it was a good time to start to build a position. 

Additionally, there was a Bull Flag pattern that was forming and if there is a breakout to the upside, the measured move suggested there was a bit of room for the stock to run before the bulls take out profits.  

This target level also correlated with a prior support level which could become future resistance for the bulls, suggesting that the bears will be waiting to jump back in at those price levels.  

So, why did I do this?

I thought CHWY was going to be a strong stock into the end of the year as funds begin to “bargain shop” for overlooked ideas that have room to run.

Here was the trade plan sent to subscribers:

The Trade Plan:

I am going to keep a pretty tight leash on this trade. If it breaks the $61 level, I will exit with a loss. I am aiming for low-$ 70’s and possibly even $78 in the next couple of weeks.

The Trade Details:

• Higher-risk “spicy” idea: CHWY Nov 5 2021 67 Call near $1.30
• More conservative “mild” idea: CHWY Nov 12, 2021, 62 Call near $4.20
• Another lower-risk option on this idea that I like is to sell CHWY Nov 5, 2021, $63/58 put credit spread around $1.20. 

The Missed Trade

I had a buy order in at $4.20 to get the 62 call options. The price of the options got to $4.30, and the skyrocketed! The options went to $6 in about an hour. 

I was disappointed to miss the entry, but I’m a disciplined trader and did not chase the stock!  I was waiting for a pullback at better risk-reward prices, but that never eventuated. I knew it was possible that I would miss the move, which is what happened, but as a professional, I worry about losing my trading discipline more than I worry about missing out. There is always another great trade around the corner.

The trade idea worked as well as could have been expected. Unfortunately, I didn’t get a fill and missed the move. The point is my reasoning for the trade, and the setup was ideal. Missing trades are a part of the game. On to the next one!

Bottom Line

When you’ve got high growth, momentum, and market favorite stocks like CHWY, these are the type of stocks I want to buy on dips. 

I look for pullbacks in strong momentum stocks and wait until they form a base. In my opinion, CHWY is a great company. Some bad earnings brought the price of the stock down. Making the most of bad news is how you can get stocks at a discount.  A stock needs to have bad market sentiment if you want to get discounts on stocks you want to own!  

CHWY was starting to consolidate at $60, a major daily technical level from least year which started the move to $120. This was a great spot to make a swing trade as the stock was down almost 50% from February’s highs. The stock proceeded to move up 15% in a week. Although I missed the entry, my reasoning for the trade was spot on!