Friday, March 16, 2007

Dummy Trade of the Day - Zoltek Companies, Inc. (Public, NASDAQ:ZOLT)

ZOLT gapped up on heavy volume and quickly took out the OR high and just as quickly reversed, however it did hold the OR high as support throughout a lengthy consolidation. During the consolidation, it carved out a bearish engulfing bar but quickly regained its composure. I took a long entry on a break of the bearish engulfing bar's high as price had a lot of support from the 5 period EMA. We had a minor consolidation at the 38% Fibonacci extension, followed by a nice move above the 62% level. I thought we might get to 100% which lined up very nicely with daily resistance, however, a false break of the afternoon consolidation highs, resulted in a tighter stop and a stop out. ZOLT closed at 62% extension level.


After gapping up and fading, FMT retraced 38% of its last leg up (Tuesday's low to Friday's high) and starting to print some green. I took a small low risk position hoping for a rally into the close. A nice way to end the week.


Good news from our student reader from last night, Vivek has informed me that he sold his LEND shares in pre-market this morning for a handsome gain.

I tried to short LEND today and there were no shares available. I've posted the chart to show that the 39% Fibonacci retracement of the last leg up will coincide nicely with a gap fill, so if we get a clear reversal pattern in this area Monday, it could setup a nice trade.

Have a great weekend!

12 comments:

Vtomer said...

Jamie,

Can you please explain or refer me to some place where I can learn about this gap fill idea. Also, I think I will watch LEND closely monday and make a move (no risk one this time).

Thanks for your info.

Regards
Vivek

Jamie said...

Hi Vivek,

I will do a Q&A post over the weekend to answer your and other readers questions. In the meantime if you want to study up on gap trading, I recommend Stockcharts.com Gap Trading Strategies

Trader-X said...

Nice ZOLT trade - I got in a little earlier, but you took more out of it.

Have a good weekend.

Jamie said...

Thanks X,

Congrats on ZOLT and TRMS - two flat base breakouts in either direction. Nice work for a quadruple witching Friday when good setups are hard to find.

Babak said...

Take a look at ENER (March 16, 2007)
on a 15 min chart it had a WR candle which cleared previous resistance. Then two NR which held at or above the OR.
A break of the 3rd candle's high failed.

Would you have taken this trade? why & why not?

Thanks

Jamie said...

Hi Babak,

I like the fact that the OR has no shadows, has cleared resistance and that volume is above average. In these WOR Base and Break patterns, I prefer if the consolidation of the OR takes place in the top 1/3 of the OR so that I can include the OR high in my base. However, if price does take out the OR high, I still need to form a base of at least two sticks, so I would not have taken the entry above the third bar high. I could have contemplated an entry on a break of the second bar high after the fourth stick, which together with the second stick forms a base. However, in this case the fifth bar reversed.

The other thing that I don't like about this setup is the doji type sticks (bars 2-3) which lean towards indecision. Also, you call them narrow range and I call them mid range because bar 2 is approx. 1/2 the size of the OR.

If you go back and read my post from last weekend, you will see that I talk about the base "If the base is not perfectly aligned with the OR high/low, draw a resistance line to determine the entry point."

Maybe it is not clear because I noticed at least one other trader blogger who tried this setup this week, trading it from an NR7 entry as opposed to a base and break.

Let me know your thoughts with respect to clarity. If its not clear in the original post, I will have to re-emphasize the point.

Here is a link to the original post

Trader-X said...

RE: ENER - I would not have traded for several reasons:

1.) First bar was too wide range for me - I would be worried it made most of its move in that one bar.

2.) There was no entry signal - the second and third bars were doji(s), which indicates indecisiveness. I would not enter on a break of a doji's high, especially after such a wide-range first bar.

3.) Not really much of a gap - only .04 between the previous day's close and current day's open. I don't think this would have been on my watchlist.

Also, if you look at pivot points - R2 was 34.32...right where the second and fourth bars left long upper tails...

Jamie said...

Thanks for the input X. It gives my readers and I a better perspective on your criteria and your analytical process.

Agree with all of your points. The only exception is #1, where although the bar is wide, it shows a lot of strength by closing on its highs and with a proper base in the upper range, it could have formed a nice base and break pattern. It was not the case for ENER, but I've been successful with a WOR base and break pattern in the past, most recently Friday March 9th where I traded STP and YHOO.

Generally speaking the risk reward ratio on this setup is 1:2. That might not be enough for many traders who look for a minimum of 1:3. The thing I like most about it is that it is usually quick and orderly which compensates for the less favorable RR ratio.

Babak said...

Thanks for your feedback.

1)The first bar is extremely strong, as Jamie points out, and it is a 60 cent move on a $34 stock. That's only a 1.8% move. Hardly extreme enough for the move to be over.

2)The second bar is an inverted hammer. And the third bar is not a doji either. Maybe you're looking at a chart that is scaled wrong. I have a zoomed chart of ENER on Trader's Narrative. Check it out.

3)Agree, not a gap. But I'm not looking exclusively for gaps. What matters to me is expansion, contraction and again, expansion.

Did anyone notice the support provided by the 5 day moving average?

Jamie, could you explain the risk reward a bit more. Are you referring to a target based on the Fib extension?

Jamie said...

I agree that the 5 EMA is in close proximity, but having checked your blog, our charts are completely different. The open and close of bar 2 on my esignal chart reads 34.14 and 34.13 = doji. I've confirmed this with stockcharts ENER

I can't tell from your blog which charting package you are using but it looks strangely familiar, Big Charts perhaps?

Jamie said...

Yes, by risk reward I am refering to the 38% extension which lines up fairly closely with the real pivot point on the daily timeframe $34.75

Babak said...

Thank you X and Jamie.

I've double checked the charts and it does seem like mine was off. They are dojis in fact. I just tripled checked with other sources. I'll correct the chart on my blog.