Saturday, July 18, 2009

A Short Trade In GME


The short trade in GME seemed to be a rather obvious setup. After a long labored rally from the November 21 low, GME rallied in 3 waves to the top of its upper parallel trendline and the 200dema where it reversed. About the same time my younger children started buying used games at Gamestop, which they informed me were much cheaper and that of alot of their friends were doing it now too - translation: lower earnings.

After the reversal, GME broke down below the steep upward sloping trendline and formed a sell pivot. I went short a half position just below the pivot. Another pivot formed at the lower trendline, but at that point it was just before GME's scheduled earnings announcement so I decided to hold on adding to the position.

The earnings and guidance disappointed as expected and GME gapped down, and then rallied back to the trendline. Since the gap down completed a 5 wave decline, I decided it would be best to wait for the completion of an upward correction and a new sell pivot. However, the rally to the trendline was it, and the sell pivot formed at a lower level. Being so far from my initial entry I cut back on the position size on the second entry.

On July 14, a MACD positive divergence buy signal was generated and GME closed above it downsloping trendline, which also happened to be one day after the first big move up in the markets off of the July 8 low. Therefore, even though my target below 18.00 was not hit, it was time to cover.

GME has now completed a perfect 3 wave abc, zigzag, decline from its April high, so we can expect that a rally back up toward and perhaps above the April highs is underway. I certainly have no intention of going long this stock, but it may be a future short candidate.

Overall I captured 32% of the move, which is fair, for a profit of 15.9% and less than my goal of 30%, but I am not complaining. I think this conservative approach repeated in a disciplined manner will yield consistent profits for patient traders. The time in the trade of 50 trading days works out to about 80% annualized.

3 comments:

dave said...

You have 5 sons & you sold GME short ? What in the heck do you give them for Christmas socks & ties ? I guess if you had 5 daughters you'd be selling Payless Shoes short ?

I'll have to admit that i've never played a video game in my life other than the time i played Pac-man 30 yrs ago for about 30 seconds with a 6 y.o. I don't even play the free computer games on that come with my PC.

Once, about 18 yrs ago when i was visiting a friend i played roulette on her PC, I thought that i would stop when i got to $100k; then $ 1mln. I finally stopped when i got to $1 billion. I was making $1 mln bets. I realized that there was an inherent advantage (can't remember what it was) that one wouldn't have in a real casino.

Even though i have lived in Reno for about 18 yrs i have never personally played a tables game of any kind. I do & have bet on sports, all 4 majors, but never horse racing despite growing up between two of the most famous race tracks in the U.S.

I keep thinking that i'd like to play strategy games Othello or Pente online, but i have yet to get around to it.

Regards,
dave

R. Craig Pritchard said...

I must admit that I do not play video games either. My kids are merciless with me, so I always lose badly.

But I do watch and listen to comments and behavior of friends and family relative to local businesses and been successful with a few trades doing so.

At the moment I think Krispy Kreme will become a successful turnaround story. There is no love at all in the investment community for KKD, but the locals keep buying the doughnuts like crazy, and some institional investors are holding onto their shares.

Another local stock that is taking off is RFMD. When a friend of mine was buying at $30 and $40 several years ago, I told him the stock was going to $2. Well it bottomed at $0.70. Now, they are getting government funds to go into the solar business. It was featured in the local news. The stock has been going up impulsively, so it may be another turnaround story.

Have a great weekend.

dave said...

"My kids are merciless with me..."

I think the reason why i only played Pac-man for about 30 seconds with that 6 y.o. was he couldn't believe how incompetent i was.

One of the things that Richard Dennis was looking for when he recruited the original turtles was game-playing aptitudes.
https://www.emccta.com/pdfs/wsj_article_summary.pdf

OTOH, my ex-gf could play "Free Cell" for 4 or 5 hrs at at time, but she understood the fungibility of money as well as i understand Swahili.

One morning on her way to work i showed her proudly how i had sold a profitable long position in her account. She pointed at the chart on my screen & said that i should have sold it "there" (0.16 higher at the top).

I remember RFMD. They were at the forefront of Wal-Mart & industry switching from barcodes to a more advanced technology.

Krispy Kreme is another reference to NC which is one reason why i had recommended

http://hartdolls.blogspot.com/2007/12/mitford-days-at-blowing-rock-nc.html

http://www.mitfordbooks.com/

Hope your wife is doing better.

Regards,
dave