Monday, July 31, 2006

Mailbag -

Interesting question from a regular reader re. Friday's Trade of the Day:

Nice trade on NVDA. What drew your attention to the stock in the first place? Is there any reason you didn't buy when it first pierced the previous day's high, which I have seen you do in the past? Was it a matter of not trusting the gap in the market and seeing how things played out before jumping in? Any clarification would be appreciated...Thanks.

NVDA has been part of my playbook for the past two weeks. I've been tracking the pivot points and various levels of support and resistance each day. On Thursday, it carved out a doji stick on the daily chart which led me to believe it would pull back before going higher. A combination of factors led to a gap up including the GDP data and talk of an Intel/Nvidia partnership. In the current downtrend, I'm not buying gap ups. I usually buy gap fills and that was my intent when I spotted the intial gap up on NVDA. However, it formed two candles with high upper shadows which signaled a pullback, but it consolidated in a very narrow range instead. So I decided to buy if it took out its pivot point - $21.35 (Thursday's high) on a third attempt.

The three day consolidation breakout pattern that was so successful for me in the winter is a great system for market uptrends, but is prone to head fakes and failures in a downtrend.

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