Anatomy Of A Trade: How I Played ARBA
I often get requests by traders who would like to watch me trade in
real-time. Unfortunately, I can’t accommodate those requests. As a
short-term trader, the heightened market volatility requires laser-like focus on
my part.
I completely understand and appreciate the desire to watch someone navigate
today’s tumultuous trading waters intraday. No matter how much preparation one
does at night, and regardless of how choice the setups are that you focus on prior
to the open, once the bell rings it’s a brave new world. Preparation is not the
Holy Grail — but it’s the next best thing. It beats the hell out of reacting to
anything that moves. Nevertheless, speculation is observation. It means noticing
subtle nuances and keeping opinions to a bare minimum in order to be able to
hear a stock when it speaks. Those who consistently profit in the market are
followers. They don’t have authority issues and don’t argue with Captain Market
when he gives marching orders.
This is why I decided to write an article on the anatomy of a trade, which
will likely become a series of articles in the same vein.
It’s true that no matter how many books you read there is no substitute for
“time in action.” No amount of teaching can completely ready a trader
for the emotions on the field of market battle. But being prepared by having a
plan of attack, a circle of stocks to focus on, and a selection of setups to
stalk will give you the ammunition required to wage the war.
Let’s take a look at one trade to see what I mean about integrating the
message of the daily chart with the intraday action to see how putting pieces
together can benefit your trading.
Figure 1 shows a daily chart of Ariba [ARBA>ARBA] from Aug. 4th through
Nov. 10th. Figure 2 shows an intraday chart for Nov. 9 and Nov. 10.
Figure 1
Observation 1: I noticed how ARBA had made triple bottoms (1, 2, 3)
testing the area of prior highs between 148 and 150 (A). “Price ceilings
often become price floors” is an old saying among traders. The triple test
appeared to create a new base which could potentially become a launch pad.
Observation 2: On Nov. 8 I noticed that ARBA scored its second highest
close, yet had not made a new intraday high. Stocks verging on breakouts —
large range breakouts — will often register closes at or verging on record
closes without actually trading into new high ground.
Observation 3: Interestingly, ARBA had attempted to attack the prior
high of 198 5/8 on Sept. 27 (B) on two other occasions. These had failed,
creating a 3-point downtrend line. The resulting price swings left ARBA in a
triangle pattern. At B, ARBA gave a multiple sell signal. The stock left a
Gilligan Expansion Range Doublestick sell setup after a vertical runup from 130
to 200 in four days. That run exhausted the stock short-term and required some
backing and filling — putting the stock in strong hands and shaking out weak
hands. This eventually creates ease of movement higher.
Observation 4: Often, breakouts over triple tops, whether in wide and
loose consolidations or angular triple tops as in the case of ARBA, are
explosive. I call these “Rule of 4” breakouts. ARBA’s close on Nov. 8
above the downtrend line on a large range day suggested to me that ARBA was
ready to play catch-up to the Nasdaq Composite which was already seven days into
a fast run at new highs. That is, the technology stocks were in gear.
Observation 5: This is where the observation of intraday stock
behavior is critical. ARBA gapped open on Nov. 9 at 183 3/4, indicating
momentum, and held early gains. That suggested the likelihood that prior highs
near 200 would be tested or exceeded.
As you can see from the intraday chart, ARBA stayed in a clean channel
throughout the session. This is typical behavior of trend days where virtually
all pullbacks are met with buying and stocks tend to close in the top 15% of
their range. Moreover, despite the fact that the Dec. S&P futures popped
open on Nov. 9 but quickly reversed and stayed down on the day, ARBA defied the
market from the get-go. In effect the stock was saying “full steam
ahead!” It was a torpedo for the entire day, persistent in its targeting of
new highs.
Figure 2
If you missed the trade on Nov. 9, there was another set-up to be had.
Remember, stocks walk before they run. I subscribe to the Rat Pack Theory of
Momentum: One good price bar is usually followed by another.
Since ARBA was an Expansion Breakout New High close on Nov. 9, it was bound
and destined to attract more momentum-type, pile-on players the next morning.
On Nov. 10, the S&P futures followed through from the preceding day’s
poor close, trading down nearly 10 points early on. Many stocks opened down in
sympathy, including ARBA which opened at 199 9/16, off about 3 points from the
prior close. That open was basically the morning low tick as traders rushed in
to capture a continuation of Tuesday’s move. As soon as the S&Ps stopped
plunging, ARBA lifted. If they’re not going down, they’re going up. As you can
see, ARBA’s down open was a gift, only serving to compress the stock which
quickly catapulted to over 210, had a first pullback to 208 and raced to
216. This amounted to a huge 15% gain in only a half-hour.
There are numerous opportunities for short-term traders to capitalize on
these brief bursts of momentum. However, without the patience to stalk a stock
and adhere to the discipline of trailing stops, you can’t consistently profit.
The chart of ARBA on Nov. 10 shows that, after the first extended pullback
(C), the stock attempted a rally to test the highs. When that rally failed and
the pullback lows were violated, the stock waterfalled to near the mid-point of
the prior day’s run.
The weight of evidence from the daily chart combined with the strong intraday
relative strength on Nov. 9 suggested the acceleration on Nov. 10. When ARBA
turned positive despite the S&P’s remaining waterlogged, the message of
higher prices was conspicuous.
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