Avon Products (NYSE:AVP) is analogous to another opportunity at the twenty five cent slot machine. The tumblers are ready to trigger for the payout. I wrote an article on Avon Products Tuesday June 12. The article was titled "Avon Products: Dead Cat Bounce." Please review it, because this article is very closely tied to the former.
Avon Products is what I commonly refer to a completed trade. That is to say, it hit our strike price which initiated the trade and it hit our exit price to "complete" the trade. Once an issue cycles in and out of the portfolio, it goes back into the rotation like a pitcher looking for his next start.
Avon Products triggered our buy price of $15.63 on June 13. On July 5 the position was closed at $16.40 for a nice gain of 4.93 percent. I believe there is a similar trading opportunity now. Avon Products has successfully re-tested a recent bottom. The re-test was successful because the volume has been lower than the average daily volume subsequent to the previous low when the volume was 800% higher than normal. This indicated to me that there is not much inventory left for the Designated Market Maker in this issue to absorb. For all intents and purposes he has loaded the boat and will distribute at higher levels.
I have intentionally left out the blocks because they have been creating some confusion among the readership and I do not have the time in these articles to fully articulate their importance. Rest assured there was a very large block that traded and it was the driver for this article. In fact, it was the largest block to trade in this issue since 2008. Click on the above link and read the previous related article. Better still -- read all of the articles.
I am neither bullish nor bearish regarding Avon Products. It is simply well positioned for an upside move. In the meantime this is a market to be traded. You will need trade this market.
It is quite possible (but not certain) that the Designated Market Maker has established a long term capital gains position. If such is the case, Avon Products may linger at these levels for a bit longer than usual because he will attempt to keep public interest at a minimum. The old adage of patience being the virtue which conquers but is never conquered will once again be put to the test.
When I first made this call, I said to be patient and that it could be as long as six weeks for this to cycle. I believe Avon Products will flat line for a few weeks and then advance. For the next few weeks the market will be moving lower. Be patient and allow the trade to work. In the event you get an opportunity to liquidate at or near the trigger price -- take it.
On the basis of the foregoing, these are my views and observations:
I recommend establishing a long position in Avon Products. Open your position with only 1/4 of whatever capital you intend to commit to Avon Products at $15.10. Purchase the remaining 3/4 of the position at $13.89 and stop out at $13.32. Do not post your stop out. I have said it before but it is so important that at the risk of being redundant and in an abundance of caution I will say it again. It is too easy for the Designated Market Maker to cash investors out by moving the price above or below your stop out and move the price right back down or up again. In addition, when a stop out is triggered it converts into a market order and that could be disastrous if the Designated Market Maker decides to really take advantage. Remember the "Flash Crash"? I would be looking to exit the trade at an upside price target of $16.95. Do not allow this position to exceed 5% of your overall portfolio. There is always the possibility that the trade may not work out.
There Is Never A Sure Thing (particularly on a short)
Investors must realize and recognize that there is never a sure thing. Sometimes events that have a low probability of occurring, bring forth very serious consequences should they come into being. Investors must judiciously consider what the inherent practical limits are and how much they stand to gain in relation to the risks involved in establishing any position.
In addition, persistence can become desperate folly by allowing a losing position to become a viable argument for deciding on a new position. Rather, such decisions should be based on the current and soon-to-be circumstances.
Any position in which one unexpected factor has a significant impact on your portfolio is the result of poor planning. It is a fault most commonly associated with people who want to explain away their losses.
If you follow the process recommended and the trade does not work, the overall loss in this model is $3,000.00. That amounts to 0.3 of the overall portfolio (theoretically valued at $1,000,000).
And finally, never be a brave and brainless investor, because a fool and his money are soon parted.
A portfolio of $1,000,000 should position size in the following manner:
This is a trade, not an investment. Be ever vigilant.