If you’ve been reading my reviews of my early trades, you know that I was wondering why I don’t trade some of those early ideas anymore. They aren’t bad ideas, really… my execution was just very bad on a lot of them. Today, I traded one of those old ideas.
I woke up late, and missed the first 15 minutes of market action. And worse, I knew I was going to be away from my screens most of the day. I knew I wouldn’t have time to wait for a proper breakout setup, since so many stocks surged so hard at the open. It takes time for them to properly consolidate, and gather more steam. So, I decided that, instead, I’d look for a stock that was running too fast, and short it. It’d be fun and quick, and it also just felt cool to be shorting a stock when everyone was talking about how strong the market was this morning.
About the Setup
So, the idea is simple enough… When a stock has pulled away from a fast moving average (say, anywhere from 5 to 10-period averages would be fine), it is in an unsustainable situation. One of three things will happen very soon:
- The stock continues higher, and the moving average catches up.
- The stock consolidates sideways, and the moving average catches up.
- The stock falls back to the moving average.
So, you find a stock that is over-extended. It has run too far, too fast at the open, and created a big gap between the current price and a fast moving average. When it shows weakness, you short the stock, looking for case #3 to materialize. The risk involved is generally acceptable because you only take a small loss if case #2 occurs, and case #1 is the least likely of the three if you gauge the weakness correctly. I don’t have any backtesting to back up that assertion, but I’ve been looking at intraday charts enough to know that it’s relatively rare for a stock to show weakness, but then go straight up without any meaningful dips.
Today: Navteq Corporation (NYSE: NVT)
In my old trades, I was not very sophisticated about selecting a weak stock. I still may not be great at it, but I think I did a decent job. Let’s look at the evidence I considered for todays NVT trade:
- The stock was running on unusual volume, so plenty of enthusiastic people buying at the top of the opening move might panic and help drive my short to profit.
- We were coming upon the “reversal period” at 10:15 to 10:30ish. A little early for it, but coming in range.
- On the daily chart, the stock had run up more than usual without reversing. “More than usual” is just a pretty sloppy assessment, meaning “much farther than any other run in the last six months.”
- On the intraday PnF chart, you can see that the upward momentum slowed down quite a bit at 9:42, when the price crossed 44.00. It then pushed a little higher before falling back down and giving a sell signal. The signal happened to correspond not only to 44.00, but a break of a minor trendline.
- On the 15 minute chart, the wide opening candle is all wick above 44. The second candle is green but weak, with a tall upper wick. The third candle drops below 44, giving me my shorting opportunity. It dropped a little over a point to meet the 5MA, and then dropped another point for good measure.
When all these things come together, it’s hard not to make the trade, no matter how strong the overall market is! I was a wimp, and got out when I had a 3.25 R gain, rather than waiting to hit the target. If I see enough examples hit their targets, I will (slowly) get more brave with these plays, and possibly refine the way I choose targets. If I start making these plays often, I’ll give them a name and track their performance separately in my stats, as well.
| Stocks Mentioned In This Article | |
|---|---|
| Stock | Links |
| NVT |  |  |  |
