Saturday, March 21, 2009

A Short Trade In EXPD

In January this year I recognized the potential for a developing triangle in EXPD, shown above. As frequently happens in triangles, wave E moved strongly into the zone of the wave C high, but then quickly reversed. I waited until the Qs had made a new 3 week low on March 19 to consider a short trade. At that time EXPD has formed a very nice short pivot with 2 higher lows above the March 17 low with the pivot below the 50dema. Using the width of the triangle from the October 2008 low to the wave a high and subtracting from the wave e high gave a target of 17.75. I also calculated a target of 18+- using other methods. With all elements lined up to the short side, i.e. 1) market(Qs), 2) pattern, 3) 50dema and 4) pivot, I entered an order to go short at 29.25 with an initial stop of 34.20 and a target of 18.25.

On February 20, the order was filled. By March 5, EXPD appeared to be in a minor 5th wave down as the broader markets approached downside targets at an impending turn date. At that point, the risk in EXPD was clearly to the upside and the expected target had not been met and EXPD was near the October 2008 low. If EXPD were to meet the lower target, it would require riding out a potentially deep 2nd wave and giving back all of the profit and more. Therefore, the prudent action was to take the profit and wait for a future opportunity. I covered the short on March 5 at 24.72 for a 15.5% gain in two weeks. Subseqently, EXPD has rallied sharply to the 50dema and swing high of 29.44 while the Qs have made a 3 week high. Even if a new short pivot were to develop in EXPD, I would not go short at this time without supporting action from the broader markets as EXPD is likely in a larger upward correction.

The exit in this trade falls under the general principle: "Don't let your profits run into losses." I say this is a principle and not a rule, because a rule has specific unambiguous criteria. In order to be successful, traders must operate from a set of specific rules that follow from first principles.

Over time, I will be examing how we can develop a set of specific rules that support profitable trading.

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