Catching a falling knife versus Being a smart trader:
1. Individual stock is going down on negative news. Never stand in its way -- it's just not worth it. However, buying stocks selling off in a sector that is deeply oversold and running into support is often a very profitable strategy.
2. First few days of a trend-change from overbought status are not the time to start buying support. You have to be patient enough to wait until the stock goes from overbought to oversold AND comes close to support.
Let's look at two example from this morning:
We posted the PCU chart on Chart.ly last night with an interest in the 200 SMA area near 28. However in the morning weakness we bought some under 29 -- posted real-time on our Twitter Acct.
We were confident in the trade and would have happily added at 28 but often on a stock as oversold as this you don't get the chance to get the exact support and have to get in early.
We also posted our SU buy this morning near the open on support.
This was just a gorgeous example of a stock deeply oversold running into solid support:
As with any profession once you gain some experience you understand that there are nuances to everything. Of course there is some truth to the "don't catch a falling knife" proverb (reason we wrote this morning, for example, that we were staying away from X sell-off on earnings). But often, and especially in commodities the best time to buy them is not on break-outs (and we're primarily break-out traders!) but on support.