StreetSmack Short Scalp: Companhia Vale do Rio Doce (ADR) (NYSE: RIO)

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I spent a lot of the morning throwing money away. I got no love from CAL as I tried to short it 7 times from around 31 and it never moved. We had a big expanse to cross, and on a day with normal volatility in CAL we should have hit 30 easy, as Jamie said today.

I was down about -2% on my equity when Wallstreak user dinsf called out RIO as a potential short candidate. I looked at the daily and the 15 minute to get an idea of potential resistance zones that might stop RIO’s advance:

Daily:

15 min:

With these resistances and targets in mind, I turned to the 1 minute chart to look for momentum divergence.

1 min:

I saw one (though it was very small) and decided to scale in 1/5 of my overall position size at 49.19 after a relatively high volume candle with an upper tail fairly near the overhead resistance. I would keep an eye on the resistance levels to make sure I got out if those were breached. RIO started to slide, caught a bounce or two, and then threatened to make a lower low. That’s when I piled in the other 4/5 of my position at 48.90. (In retrospect, I was too conservative and should have scaled in sooner–I sat out of half of the move!) I covered half when we had a lot of chop at 48.75, fearing a move back above my pile in point of 48.90. I held the rest until we hit the target area of 48.40, and covered at 48.36 for the rest.

I don’t know how to characterize the risk / reward on this play. My initial risk was from my entry at 49.19 to 49.50 (the highest resistance and also my failsafe point) on 20% of the position size, I suppose, but when I piled on short I could have easily lost more than that if we had a quick reversal. According to this measure, I returned +6.3R on this trade, but I don’t know that this is a fair number. Any ideas on how to track the risk on these plays?

Sadly, this win was only able to bring me to within $5 of being green for the day. I ended barely down, but I got practice in a StreetSmack scalp, so that was awesome. I should have pressed more on my pile-in timing and also on my ultimate position size (I could have traded more shares), but that will come in time.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com