Example of scaling out and not pyramiding up

CISCO: BACK IN PLAY

On occasion, an old stodgy name actually can reinvent itself and make for a solid trade under
the proper circumstance. In an environment with great uncertainty and global challenges,
we’re seeing a move toward financially sound companies that have weathered the storm and
are righting their ships.
SPOTLIGHT ON CISCO
A fallen favorite from years gone by — Cisco Systems (CSCO) — may be ready to come back
out to play. In August, the company topped analyst estimates and delivered a solid quarter.
More important, it made fundamental shifts in its business model that Wall Street seems to
appreciate. For example, the firm has dropped its flip camera business, which was not
working as planned. It is focusing on switches and routers — its bread and butter. The
company is cutting 6,500 workers and has a ton of cash to the tune of $44 billion in the event
it wants to make some crafty acquisitions. Yes that’s with a B. If you do the quick math,
that’s roughly $8 a share in cash.
THE CHART
From a technical perspective, the part that makes the trade interesting in my opinion, the
stock is attempting to break a descending trendline that began in May. It is doing this after
consolidating the post earnings rally, which was needed to work off the short-term,
overbought conditions. As a longer-term swing, the stock looks attractive.
THE TRADE
Buy: CSCO between 16 and 16.80
Stop: 15.50
Target: 17.65 and 21.70
As discussed in the video, it is critical to size the trade appropriately for your own risk
tolerance if you follow my lead.
Quint Tatro is founder of Tatro Capital and portfolio manager of the Tatro Capital Tactical
Appreciation Fund (TCTNX). At the time of this writing, Tatro was long Cisco Systems (CSCO).
BUY THE BOOK
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Trade of the Month Update
Cisco Trade is a Winner
This was one of those winning trades that unfolded just as you planned.
In the October issue of SFO, Quint Tatro, founder of Tatro Capital, recommended a buy on
Cisco (CSCO).
GETTING IN
SFO readers had the opportunity to follow Tatro's trade idea on Oct. 5—Cisco traded in the
buy range between 16 and 16.80 and from there it literally exploded higher and never fell
back to retest the entry zone.
If you went long Oct. 5, you could have taken partial or all profits at the first target at 17.65
on Oct. 26.
CURRENT LOOK
However, Tatro also had offered up a second target at 21.70.
More recently, it appears that Cisco has formed a so-called bearish island top on the daily
chart. Check it out — you don't see these patterns that often. An island top forms when the
market gaps up, which it did Oct. 26-27, and the consolidated a few days before gapping
lower on Nov. 1. It left an island of activity overhead.
Given the bearish chart development, I chatted briefly with Tatro on Nov. 1 to see if he
remained bullish on the trade toward the second objective.
SCALING IN
"Traders should still be long Cisco here. However, this is a great example of scaling out and
not pyramiding up. The way I like to play any stock is to quantify my risk, and when targets
are hit, I take portions off and raise my stop," Tatro said.
Scaling out of a trade means you take partial profits on the way up. Traders could have taken
75% of the trade off at the first objective and then moved their stop to break-even.
DON'T LET IT TURN INTO A LOSER
The "stop should be raised to entry to protect and not allow this trade to turn into a loss,"
Tatro added.
OVERALL MARKET
This is a skittish market. Global financial markets have been extremely volatile and reversing
trends quickly in the current environment. Traders are well-advised to use tight stops and
take profits quickly.
"The market is bearish,” Tatro said. “Odds are, traders will be stopped out of Cisco, but it
should be kept on the list for another day should this happen. The tape is going much lower."