It was a pretty ugly market day, today. We spent a lot of today stuck in a range, and by the time the dow and nasdaq broke Friday’s trading range, a lot of charts I was watching were busted. If you followed my twitter feed, you know I was basically down to watching FD, ENT, and ESRX once the day was underway.
The Setup
I called this a breakout play, so I might as well describe what I mean by that. Let’s look at Federated Department Stores (NYSE: FD) on a daily timeframe, as it appeared last night:
It obviously is having a bit of trouble getting through 45. That’s the idea behind how a breakout works. It has to be obvious to a lot of people. That round number 45 is so obvious on the chart, that everybody else on the planet is likely to notice it, too. So, the plan is to jump on the train when the stock breaks though, and jump back off before the excitement dies down. That plan is doubly important because of how sloppy the chart is; there’s no real technical pattern here that I can spot, like an ascending triangle, or a bull flag, or what have you.
The Trade
Here’s a chart of the trade.
Here, a second time, check out how obvious the resistance at 45 is. You’d have to ride a really short bus to not see that. So, we are pushing up against resistance on two timeframes. To me, this means there are two whole classes of traders and investors interested in this breakout. Fantastic! It gave me some confidence in a high probability, big volume push. Now, whether that push would follow through is another story…
At least, unlike the trade the other day, I wasn’t seeing a lot of big money pushing the stock back down. It felt more like the buyers were just shying away from actually breaking into new territory. So, I wasn’t necessarily expecting a bull trap.
When the break finally happened, I got in by watching the time and sales, and trying to spot the last possible moment to enter the trade at a decent price (as I discussed here). Since I never (well, almost never) front-run breakouts, it might have been impossible to catch this one without some skill in that area. It popped pretty quickly on huge volume when it broke though.
I got right back out, partly due to the lackluster (at the time) overall markets, and partly because I saw prints go by at my 2R point. Unfortunately, I only got filled for 1.2R. But, that was a quick and easy 1.2 R, so no complaints! I fully expected to see the price get slapped back down to re-test 45. At that point, if it consolidated a little I was going to buy back in. But, it didn’t go that way, and I turned my attention to other things.
A couple more points:
- This is yet another example of why you should never front-run a breakout. You’d have been in the stock a long time before the move happened, and the dip it took might have stopped you out. Lots of other days on that daily chart, you can see it grazed 45 and never made it through… you would have lost on every one of them.
- You may have seen a comment I put on one of Phileo’s recent posts, where I talk about selling into the first surge on the stock. This is another example of how I could have stayed in another 45 minutes, but ended up with the same amount of profit I had after 10 seconds. I think, when you get in a trade, you have to decide up front whether you’re in it for the long haul (set a stop and try to forget about it), or ride momentum (sell into the first surge in your favor).
In a nicer market, with a clear chart pattern behind it, I might have hoped for a 2 or 3 R breakout. On a day like today, I’ll take what I can get! I hope your day was swell.
| Stocks Mentioned In This Article | |
|---|---|
| Stock | Links |
| FD |  |  |  |
