Trade Recap: DRL on May 12, 2014

DRL was on my May 12 Watch List after its big move on Friday. DRL started the day in the red, but slowly moved up and went green on the day.

I had an alert set for this red/green move and placed an order at $3.08/share once I saw that the red/green move was sustainable.

I sold at $3.30/share to lock in profits of $0.22/share, however, the stock ran even higher. I took my easy gains in a matter of minutes. $3.30 was an arbitrary number, but I wasn’t patient enough to deal with the intraday fluctuations of the stock. DRL pulled back down to $3.07 a few minutes after I sold but soared to $4.47 at the high of the day.

Later during the day, an ascending triangle pattern was formed and I tried to place an order around $3.60 but never got my execution. I didn’t want to chase the stock considering it was already up on the day a lot and there was a lot of short interest.

Main Lessons Learned From This Trade:

  • Red/green moves are great indicators when a stock is already on a lot of people’s radars. The red/green move had significance because so many people were watching DRL after Friday’s move.
  • Ascending triangles are still one of the best chart patterns that can result in huge gains
  • Never underestimate how much a stock can run (As discussed in this post). DRL was up as high as 48% on the day with no news. There were multiple chances to cash in on this breakout.
  • Locking in profits is not a bad thing. Clearly, I could have made a lot more money from this trade if I held. I also could have lost a lot of money. Regrets will get you nowhere in trading. Any profit is good profit.
  • Having the right stocks on your watch list can help you catch on to significant movements before other investors

Here is the illustrated 2-minute intraday chart for DRL:

DRL_TradeRecap

 

 

Never Underestimate How Much a Stock Can Run

One of the hardest mental obstacles to overcome when trading is recognizing that stocks can still run higher when they already seem overextended. Common sense tells you that the stock has already seen its run and is ready to come down. Even if it doesn’t come down, it doesn’t seem very likely that it will move up much further. Consequently, common sense is hindering your trading strategy in these circumstances. The market doesn’t operate around common sense, which is proven by the massive amount of companies that are both over and under valued. So, if you can’t turn to common sense, what do you do? Try to eliminate your preconceptions of how you believe a stock will act and utilize a more concrete strategy. Refer to your trading rules and let them guide you through the trade.

Today, I was faced with a situation where I didn’t take my own advice. This ended up costing me a lot of money, however, I learned a lot from this trade. Earlier in the morning, a stock called HDY (Hyperdynamics Corporation) popped up on my stock screener. Hyperdynamics Corporation¬† had released news that a force majeure had been lifted from their contract with Tullow, meaning that HDY’s petroleum operations may be able to continue in the Republic of Guinea. From a fundamental standpoint, this didn’t seem like huge news to me, but I added it to my watch list for the day and waited for the perfect technical setup.

That setup came around 12:15 PM (market hours) when the stock broke through a key resistance level.

HDY_recap1

A large part of my intraday trading strategy is trading ascending triangle chart patterns. I use other indicators as well as some fundamental analysis, however, anytime I see an ascending triangle chart pattern, I become interested in the stock. That being said, HPJ was already up 81.2% on the day and I didn’t believe the news was good enough to justify the run. Because of that, I refrained from trading this perfect setup and carried on with my trading. As you probably guessed, the stock continued to run throughout the day with very little resistance. HDY made it all the way to around $4.12 from the breakout trigger at $2.70. So, by now, the chart must be overextended, right? Wrong.

Around 3:15 PM (market hours), another perfect ascending triangle was formed and the stock was ready to breakout yet again. By this point, I wasn’t even considering trading the stock considering it was up over 176% on the day. I assumed there would be some strong selling towards the close as people locked in their gains from a nice intraday run. Once again, common sense failed me. HDY was setting up another ascending triangle pattern and when it broke the $4.12 resistance, the stock ran from $4.12 to as high as $4.56 making the gain for the day 206%. The stock eventually pulled back to $4.44 at closing, however, that price would still provide for a nice intraday gain from the $4.12 breakout point

HDY_recap

So, what exactly is my point here and why am I going into so much detail about a trade I didn’t even execute?

The point is to always challenge your unsubstantiated beliefs about the market. Always ask why and see if you have a solid rationale. Stocks won’t always have parabolic movement like HDJ, but it is important to have a solid reason as to why you don’t believe a stock will go higher. Here are some examples of good and bad rationale:

Wrong Approach:

Q: Stock ABC is up over 80% on the day but the technical setup is perfect. Should I try to buy the breakout?

Nahh, it’s already up too much on the day. I doubt it can go higher.

Q: Why not?

It’s just up too much, so I doubt traders will push the price up further.

Q: Why not? (…and this goes on forever)

Right Approach

Q: Stock ABC is up over 80% on the day but the technical setup is perfect. Should I try to buy the breakout?

Well, the intraday setup is perfect, however, the stock is approaching a long term resistance level that it has struggled to break in the past. Volume is fading a bit and the stock keeps falling below the 10-day EMA. The nearest support level is 50% below the current price, so the risk/reward ratio is not very appealing.

Notice that both of the responses come to the same conclusion, however, one provides solid rationale and the other doesn’t. Understanding why you are or are not placing a trade is crucial, as it will help you survive in the long run. Even if the fictional stock from the above example were to breakout, if you stuck to your trading rules it would be more difficult to regret not purchasing the stock. Sticking to your trading rules can cost you profits sometimes, however, they will save you from losses a lot of the time.

For today’s trade on HDY, I had no solid rationale behind my decision. Around the time of the first breakout, HDJ had just crossed above the 10-Day EMA (another indicator I use), volume was picking up, and an intraday resistance level was broken. The chart was screaming “BUY!” but I replaced my trading rules with common sense. The market doesn’t always reward common sense, so you need to be prepared. HDY ran about 200% today. Did the company really become 3 times more valuable today than it was yesterday? Probably not. Did the market care? Obviously not. Never underestimate how much a stock can run. Stick to your trading strategy and rules and react accordingly. In regards to HDY, I should have placed my order at the breakout level and then monitored the stock closely. If the stock dropped and I was wrong about the breakout, I could cut my losses quick and move on. If the stock kept moving the way I wanted it to, I would hold it until I believed it was a good time to sell; simple as that.

 

 

The Market Was Down Yesterday? I Didn’t Notice…

One of the worst parts about investing in popular stocks such as large caps and small caps is that you are susceptible to market conditions. Over the past couple of days, the market has taken quite the beating and, consequently, many investors’ portfolios dropped significantly. Luckily, this drop did not affect my trading strategy. Of course, the title of this article is facetious, as I always pay attention to market conditions, however, it is intended to prove a bigger point. Certain markets function independently and are not prone to the influence of the larger markets. This is not to say that all penny stocks are uninfluenced by the larger markets, but there are a select few stocks that defy the macro sentiment of the large markets. Why is this? The answer is simple. Some stocks have a cult-like following that pays no attention to larger indices such as the Dow Jones Industrial Average, NASDAQ composite, and S&P 500. Essentially, these are micro-markets that follow their own set of rules. Stocks that fall under this category are traded way differently than main stream stocks. These stocks are not traded by wall street investors who pay attention to the overall condition of the market. They are traded by day traders, gamblers, dreamers, and others who are trying to make fast money (See my post about why “real” investors avoid penny stocks for more info).

So, what was I up to while the rest of the market was panicking about the massive drop? I was trading a company called Triton Distribution Systems (TTDZ). The company has positioned themselves in the medical marijuana industry and has mustered up a lot of hype. I was able to make a nice profit on the stock through intraday trades.

$528profitTTDZLong Stock
Positive catalysts expected. Broke through long term resistance on Friday and spiked on monday.

Posted by upperdivision /
http://profit.ly/1Mok78

$353profitTTDZLong Stock
Intraday flip based on positive market sentiment and breaking key resistance levels

Posted by upperdivision /
http://profit.ly/1Mojll


These are the reasons I traded TTDZ on Monday.

  1. TTDZ is the number one stock on Investors Hub – For those who don’t know, Investors Hub is one of the most popular message boards for discussing OTC stocks. Being a top stock on the site does not guarantee upward momentum, but it provides a crucial element for success: exposure. The TTDZ message board is read by tens of thousands of people. This leads to the stock gaining the exposure it needs to run, and the daily volume of nearly 120 million shares on Monday confirms this. There are many amazing companies that never reach their fair value due to a lack of exposure. Exposure can lead to high volume, and with positive catalysts in play, this can lead to a breakout.
  2. Positive sentiment – I talk about market sentiment in another post and explain why it is so important. TTDZ had great positive sentiment from a cult-like following that believes the company is going to become a leader in the medical marijuana industry. A stock can run on positive sentiment alone, as proven by TTDZ. TTDZ had no direct catalyst that triggered its movement, but positive sentiment pushed the stock price to new highs. When you have tens of thousands of people reading a message board with mostly positive posts, this can influence new investors to buy shares and drive the price of the stock upwards.
  3. The charts don’t lie – TTDZ was a great technical play based on the charts. The stock has been in an upward trend for weeks now. Volume sustains itself or increases alongside the share price, which is good, because dollar volume is increasing every day. Last but not least, the stock kept breaking through resistance levels without a problem. There were no “blue sky breakouts” after each break, but instead each new high was followed by a short run and consolidation. The stock continues to test new highs as I write this post.
  4. Volatility and Liquidity – There were plenty of opportunities to buy and sell TTDZ. The stock would pull back to its lows intraday and set new highs intraday as well. My strategy consisted of buying shares at support levels and selling at resistance levels. The liquidity of this stock made this possible. With roughly 120 million shares traded, it was pretty easy to get buy and sell orders filled.
  5. Positive catalysts expected – TTDZ shareholders are expecting a variety of positive catalysts in the near future, including financials, a ticker symbol change, and potential dividends. This anticipation builds a strong positive hype as investors believe the price will skyrocket in the future. Had a press release been disseminated the stock could have run even further, as it may do in the future.

Overall, TTDZ was an easy, predictable pick for making some fast profits. My percentage gain was not exceptional, but any gains are good gains. I limited my position size to avoid unnecessary risk. Notice how my rationale states nothing related to the company’s fundamentals. They did not matter in this case. So, what is the point here and why am I adding this example?

TTDZ traders did not care about the market conditions. No one was posting on message boards stating, “the stock is doing well, but the down market may takes its toll.” These traders do not care about the larger markets. As long as they are making money, they are happy. These aren’t wall street investors and they have a completely different mentality. It may seem naive to base trading decisions off of the posts on a message board, but when you think about the psychology of trading, it can make more sense. People are influenced by what they read, and their trades often reflect this. Of course, I had other reasons for entering the stock, as mentioned above.

A lot of other stocks on my watch list took a hit, but I avoided trading those stocks. The goal is to find stocks that fluctuate independently from the main markets on days when the market is down. By finding these stocks, you can protect yourself from drops in the market.