Tuesday, March 20, 2007

Newbie Trades Analyzed - (NASDAQ: GILD), (NASDAQ: HERO)

A reader asks me to analyse two newbie gap up trades. Here are my thoughts.

GILD gapped up yesterday and had a nice move, closing in the upper half of its range. Today it gapped up again, this time with a wide gap and a strong OR bar, extending yesterdays's move by almost 200%. This was followed by an orderly pullback to the rising 5 period EMA and finally, a three WRB rally which broke through the OR high before reversing. Having described it in this way, I'm sure you've already figured out what went wrong here. GILD was exhausted after this huge, two day move.

If we disregard the fact that GILD was overextended and just look at it as a day one gap up, I've highlighted my preferred strategy in blue on the above chart. For me its more important to enter in very close proximity of the rising 5 period EMA on a low risk, NR, setup and manage the break of the OR high, as need be, when the time comes.

If GILD had consolidated the opening gap through time as opposed to price, your entry would have been perfect. But if a stock gives you a chance to buy it on an orderly pullback, I recommend that you take the opportunity, everything else being equal. Of course, it goes without saying, that I'm not recommending that anyone try to catch a falling knife. Let the stock pullback, define its price support, form a base, and then you can buy a break above the base and the rising 5 period EMA. The other point I'm trying to make here is not to buy after the stock has printed two WRBs. Try to time the entry off of NRBs. There are only a few (avg. 3-4) WRBs in any given move.

HERO was part II of a gap fill play. If you read my chart notes, it will be painfully obvious why this one failed. However, on a regular gap up with no obstacles, you could have expected a 38% extension on this setup. You have a good eye for a base and break entry here, just bad luck on the retracement.

18 comments:

AJ said...

Nice post, Jamie. Thanks.
Aj.

Anonymous said...

HI jaime. Love your work and your dedictaion to trading. I wanted to pick your mind about a recent discovery i made. I noticed that on popular momo stocks like: ICE, RIMM, NMX, LVS, CMI, PCP just to name a few. I noticed that a decent strategy is to buy when they break from a previous day's high/low. They have a tendency to move in the direction of the breakout and could be a decent trading strategy. What are your thoughts? I also, noticed that if coupled with pattern recognition using candlesticks, it can be a fairly effective strategy.

i.e: check out: POT CMI MGM and EXC today as examples.

Thanks! Alex G.

Anonymous said...

Hi Jamie,
You said-"If GILD had consolidated the opening gap through time as opposed to price, your entry would have been perfect"

Can you explain why consolidation thru time is better than price? Thks

Zen

bl said...

J,
Nice explanation on GILD HERO, I would add, the trade becomes risky as it approaches a key resistance point, in this case previous day's gap high.

Jamie said...

Thanks AJ, Nice to hear from you again.

Thanks Alex, The 4 stocks you asked me to look at have all been forming a base over the past several weeks and have been breaking out this week. You can plan for these setups by reviewing your momo list every night. Use a 15 or 30 minute timeframe and squeeze the price action so that you can view at least one month in your chart frame. You will notice the chart patterns such as cup and handle, double bottom, etc., as well as support and resistance zones so you can time your breakout and continuation plays. I agree that the momo stocks generally trade in a more orderly fashion.

Hi Zen,
In the context of buying a break of the OR high, it is better when the gap consolidates close to that level. It's not a general statement, it just means that if your main criteria on the trade is to wait for a break of the OR high, look for setups that consolidate sideways as opposed to pulling back.

Thanks BL, Good point.

Babak said...

"If GILD had consolidated the opening gap through time as opposed to price, your entry would have been perfect"

Can you clarify this? how can a stock "consolidate the opening through time as opposed to price"?

Thanks.

Anonymous said...

Jamie,

Just want to thank you for sharing. I find your blog extremely educational. Your hard work and dedication does not go unnoticed.

Alien

Jamie said...

Hey Babak,

What I mean by that is narrow (very little price fluctuation) sideways trade until the rising 5 period MA catches up to price.

Jamie said...

Thanks for the kind words Alien.

hadman said...

I just wanted to say that this was an awesome post. Im really starting to see the strategy behind the setups.

Simply Options Trader said...

babak,
I think what Jamie means is for price to drift sideways while the MA catches up

Jamie said...

Thanks Hadman

Thanks SOT - Guess we both posted at the same time.

Vtomer said...

Jamie,

SYX is on the trend up. Looks like it. I hope so ?

Vivek

Jamie said...

Vivek,

I just looked at the chart 11:50 EST and I still see a trend of lower lows and lower highs on the 15 min. timeframe.

It's very risky to trade on the day of the FOMC.

Vtomer said...

jamie,

I think you are absolutely right (like always). I am sitting aside with dog's eyes haha.
Thanks

Vivek

Jamie said...

Good idea Vivek,

Wait till the stock breaks out of this dead zone.

Vtomer said...

Jamie,

TSL. This is a great company for next two years.

Vivek

Jamie said...

Good one Vivek,

Nice base and break pattern when it took out yesterday's high.