Saturday, May 15, 2010

Anatomy Of A Trade - GILD

I first noticed the potential opportunity in GILD a year ago. After rallying in a double zigzag from Oct 08 to Feb 09, GILD declined in 5 waves to the Mar 09 low. There was no point going short then as a major market rally was imminent, so I just kept watching it, and watching it, and watching it, for a year. Fast forward to Apr 2010, GILD was now moving down as the market was grinding higher and formed a small bear flag.

I entered an order to short a 3 day low at 45.10, about 0.10 below the 3 day low. I was filled on 4/8 at the dead low of the day just in time for a 4 day rally in the stock. Well that was disappointing, but I was not stopped out with my initial stop at 48.65.

6 days later GILD gapped down. I waited for another down day to cover 1/2 the position on 5/3. Now GILD has come within pennies of it's 2008 closing low, a level not seen in a year and half. We have positive divergences in the RSI and MACD, and price is moving away from the lower Bollinger band which has turned up. At the same time, the market may be making a higher low after the 5/6 selloff, so it is time to cover the rest of the position for a gain of 16.2% in 27 trading days.
The main reason I waited so long is that it appeared GILD was forming a large triangle. When I went short in April, it had just completed wave e of the triangle. Now, GILD has completed a large ABC decline from the Feb 08 high. I should move up in an wave (C) to retest that Feb 09 high. I don't want to take that trade as the longer trend in GILD is down. The pattern probability is not high as some other variation could show up. However, if the Feb 09 is retested, I will be looking for a short trade.

With regard to the selloff on May 6, it has now been established that a large money manager, Wallace & Reed, entered an order to sell 75,000 SP eMini contracts in one large block as a hedging strategy. This was an abnormally large order, apparently, and in a great example of herding, other large speculators began selling too. This information, as far I as I am concerned confirms that the week of May 7 was not the beginning of a new downtrend, but just a panic in a still ongoing cyclical bull rally. Remember that before the crash of Oct 08, the market had been declining for almost a year. The May 6 panic does not mark a top in the market, but does demonstrate that large speculators believe the market is vulnerable at current levels and want to hedge their risk. Perhaps they should try selling 1,000 contracts at a time over the course of a couple of days. Of course, as always, come to your own conclusions. This is just my opinion.

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