A Gem In The Junk Pile

The firm recently withdrew its announcement of a secondary offering due to an upbeat guidance and renewed confidence in its ability to be profitable without the offering. This news lifted the stock off the bottom on huge volume during the week prior to the trade. It traced a bullish engulfing bar on the weekly chart. The monthly chart (Figure 1) clearly shows the stock dropping hard on extreme volume, retesting the low, and then flat-lining with each bar getting smaller and smaller while bearishness dried up. Based on the news, the extreme oversold condition, the increasing bullishness of the indicators, and on the volume surge on Friday, I decided that this stock had enough positive inertia for a nice gain as the year closed out.

FIGURE 1: BANR, MONTHLY. The stock is dropping hard on extreme volume, then retesting the low and then flat-lining with each bar getting smaller and smaller while bearishness dried up.

The daily chart (Figure 2) shows a hard selloff in July 2009, followed by a sideways move and then a drop to a new low that was rejected earlier this month. Since then, BANR has recovered to rise above both its fast and slow exponential moving averages (EMAs) and touching the EMA50. This recent rally has also caused the force index to break out above its downtrend line.

FIGURE 2: BANR, DAILY. There was a hard selloff in July followed by a sideways move and then a drop to a new low that was rejected earlier this month.

FIGURE 3: 39-MINUTE. The bearish divergence suggested little chance of a further upmove.

When I was entering this trade, I had hoped for a big squeeze to ignite a rally, as the short interest ratio was 24 and 37% of the float was short. The market didn’t offer much, but I was happy to take what it gave in light of the unpredictability of year-end action and light volume.

I’m looking forward to trading in 2010, as the market is signaling curves ahead. No doubt this will challenge our discipline and ability to embrace new strategies to exploit the challenges.

TRADE REVIEW
Alexander Elder comments: One of the challenges of our weekly competition is that each trade is a sprint, not a marathon. A trade must begin on or after the Monday open and end on or before the Friday close. During the week in review the trading window was even narrower, as the market was closed on Friday, January 1, 2010, for the holiday (Figure 4). This round had to be won or lost within four days.

FIGURE 4: MULTILEVEL ANALYSIS AND FLEXIBILITY. Looking at this chart, you could be expected an explosive move out of a tight squeeze but end up facing something else.

Another key trait of successful traders is flexibility, and Steve’s diary clearly illustrates the importance of that skill. He was expecting an explosive move out of a tight squeeze — but ended up facing one of the narrowest weeks of the year (Figure 5).

FIGURE 5: MY WAY OR THE HIGHWAY. If you have the discipline you can survive an unexpected turn of events. Here, even though you had the opportunity to enter, at the slightest sign of a reversal, the trader sold his position and content with a small gain.

He survived this unexpected turn of events, thanks to his discipline. When BANR jumped out of the gate and it appeared that the anticipated explosion had begun, Steve refused to chase the stock. He was perfectly willing to give up a trade unless he could enter it on his own terms. I refer to this attitude as “My way or the highway.”

When the stock did give him an opportunity to enter, he bought it but immediately changed his game plan. When a rocket appears to sink back to its launching pad, it brings the entire launch into question. At this point, Steve was no longer holding out for a massive explosion. He lowered his sights and began watching for the most minuscule signs of a reversal. He sold a short-term bearish divergence, content with a small gain. A beginner greedily holds out for the big bird in the bush, but Steve happily settled for a much smaller one in hand — and ended with the best Spike trade of that week.

Next time, I will review one of the winning trades from January 2010. Let’s see what we can learn from it.