Friday, February 20, 2009

Capitulation - Bank of America Corporation (Public, NYSE:BAC)

The banks went into free fall amid rumors and speculation regarding the government's bank stability plan. In early afternoon they capitulated on huge volume. BAC carved out a morning star reversal pattern, so it appeared safe to get long.

Capitulation volume spikes foreshadow that a bottom is near. However, if not accompanied by a clear reversal pattern, size it accordingly. In other words, be prepared to average down.

For this particular trade, I placed my fibs from yesterday's close to today's low because I wanted to be conservative in my expectations. I took a partial as price approached the ORH and exit balance on gap fill.

12 comments:

Med Fins said...

The stock broke 4$ in after hours on Friday. What do you predict now?

john said...

Would that I had turned off CNBC's BAC rumorbashpumpfest and just watched that chart - congrats on a nice trade.

"Fibs placed to keep expectations conservative" ...if you're looking for sympathy about only getting 30+% on the trade, fogetaboutit:)

Trader-X said...

I hope a bottom is in - that is my freaking bank.

Jamie said...

Med Fins - Now that BAC has formed a base, target Tuesday's gap around $5.25-$5.50. I'm not making any forecasts because this stock is obviously trading on fear. CNBC isn't helping with all the rumors and speculation they throw out there day in and day out.

Jamie said...

John,

I was hoping for one of those multi-point reversals we sometimes get when the markets fall into key technical levels. Anyway, I'm glad I don't listen to CNBC during trading hours, but Briefing.com provides readers some excerpts of their rants, so I was up-to-date with all the noise.

Jamie said...

X

If this bottom doesn't hold, everyone will be running for the exits. Paulson forced BAC to buy either MER or LEH. BAC paid too much for MER. Now the Gov't should help stabalize BAC. Not sure why it's taking so long for Geithner to put out the bank stability plan. Should be some good trading in the banks next week.

anarco said...

Great trade Jamie!
I also like the orderly parabolic move in which bars become wider in range while volume increases. I have a lot of notes from last year when I started trading this pattern and I am thinking of including it in my trading plan again. But, I have observed that this pattern requires great timing, great skill, and flawless execution (not that that is a problem for you) since price can move quite quickly at those extreme oversold levels.

Jamie said...

Anarco,

Absolutely, and that's why I noted that sizing is important. Sometimes these setups require averaging down because the true bottom is another leg lower.

addtrader said...

Hi Jaime,

Don't know if you are aware of this proposed tax on trades that would basically put all us day traders out of business.

"U.S. Congressman Peter DeFazio, introduced H.R. 1068: “Let Wall Street Pay for Wall Street's Bailout Act of 2009”, which aims to impose a 0.25% transaction tax on the “sale and purchase of financial instruments such as stock, options, and futures."

This tax is on the TRANSACTION AMOUNT, regardless of profit or loss. Just a heads up. Please spread the word if you think needed.

Formerly ADD Trader

Mark Perkins said...

wasn't the real reason for the Banks run from that well timed press release from the government though about not nationalizing the banks. All news driven in my opinion and was just a manipulative attempt to temporarily prop up thee stocks. no capitulation yet

Jamie said...

Thanks ADD,

Yeah, I did post a link a few days back. Not really sure this has legs because it's intention is to penalize Wall. St. for selling toxic assets around the world, but the outcome would be to paralyze U.S. investors and traders. It doesn't address the real issue IMO.

Jamie said...

Mark,

Yeah I agree, the capitulation I was referring to was intraday. The gov't is botching the bank plan and sending out too many mixed signals, so there's little chance of follow through until they get their act together and come up with a decisive plan.