Friday, July 29, 2011

$WCG - another contra trade

Not sure what was going on with the health care stocks, since I don't follow the news much.  But they were gapping down in force this morning, and $WCG was one where there seemed to be relatively clean price action.  I wasn't trading today, but I was able to follow some of the price action.
$WCG 5 min
Short it!
Within the first 15 minute opening range, I admit I would have been looking to short this stock.  But the 14 day Average True Range (ATR) of this stock is about $2, so we were well beyond that figure.  When the Opening Range Low broke down, I thought it would have been a great opportunity to short.

No! Fakeout!
But something strange happens when a breakdown doesn't quite work out.  Even if there's a lot of volume, there a certain pace, movement, rhythm, cadence, that comes with a breakout that you know is going to work.  This one started to hesitate, and based on the 5th bar which turned into a doji, it was clear this wasn't going to be a breakout that dropped like a rock.

Fade it!
So when the 6th 5 min bar created a nice green hammer-like bar that rested up against the ORL, I might have taken a long since this would have been a Fade The Fakeout (FTF) type setup. This setup is still under development, but I think there is some hope for it...

If you missed it...
Miss a trade in a stock that's in-play?   Many times, you get another shot.  In this instance, the price went up sharply which created a VLCO (VWAP line cross over), which is simply when the 5ema crosses over the VWAP.  It's not a perfect indicator by any means, but once the 5ema is higher than the VWAP, I tend to look primarily for long setups (and vice versa).

...there's another one!
The price action retraced back into the retracement zone (.382% to .618% area of 15 minute opening range), and pulled back slightly.  It didn't pull back for more then 15 minutes when a new setup appears, a nice green hammer like bar at around 10:45 AM.  The high of the bar rested up against the 50% retracement level, which was also nicely lined up with the $41.50 level (I like the .50 levels).

Some considerations
I've found that a setup beyond the .618% retracement provides a better contra entry, but this one looked OK.  And the prior bar might have appeared to be a better entry spot, but the bar was red, which indicates a higher level of risk.  Some might also have balked at the nearly $0.60 sized stop loss amount with a somewhat wide spread, but hey, just go in with 100 shares and go for the experience. 

Get out, where?
If you look at the daily charts, April 7th and May 2nd were clear tops at around the $44.50-.75 area.  And the high of the first bar?  $43.87.  So somewhere up near the highs of the day would be a good place to target. 
  • First target = $43.75 area, just below the high of the day.  
  • Second target = $44.50-.75 area?
What happened?
If you take a look a 5 min chart, you'll see that there were higher lows for 11 straight bars after entry, and if you trailed your stop under the low of the prior bar, you would have gotten out on the 12th bar when the low of the prior bar was broken (below $43.83).

Assuming you let the other half ride, the price action eventually went to $44.76, which lined up nicely with the highs from April and May.  I probably would have exited around $44.50 area.

The bottom line:
I'm only going to count the pullback trade, since that's what I would have taken.  The Fade the Breakout is still under development.

First half: +$2.15
Second half: +$3.00
Average profit: +$2.58

More importantly:
Initial risk was about $.60, so the reward/risk was about 4.3R. 

Not bad, looks like I picked a bad day not to trade...

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