Written and copyright © 2008-2013 by Thomas N. Bulkowski. All rights reserved.
I have GAS and I know how to use it!
Shown on the right is a chart of a trade I made in Nicor (GAS). I last wrote about Nicor in my March 31 post when I talked about a
symmetrical triangle forming in the stock (I actually posted the note the day before, just as I do for nearly all of my entries). I show that pattern
surrounded by two converging red trendlines in the chart.
I placed a buy stop at 34.03, just as I suggested in the post. After all, what good is talking about stock medicine if I am not willing to taste it myself?
I bought the stock on April fools
day (4/1/08) and received a fill at 34.03667 for about half the usual position size. Why half? Because I did not trust the trading environment.
Two weeks before the trade, I
suggested that the Dow was going to make a short bounce upward and then drop to 11,000. The Dow closed higher the next day then dropped for two days,
making a new lower low. Instead of continuing down, however, the average moved up in a run to the May peak. I entered this trade on the breakout from the symmetrical triangle, but just as the
Dow was approaching overhead resistance, setup by prior peaks in February.
Even though the tight symmetrical triangle (and by tight, I hope you know what I mean when contrasted with a loose pattern, one with price meandering all over the place. A tight
pattern has lots of price overlap from day to day and it tends to move in a straight line forward, not meander up and down a lot) posed a delicious buying opportunity, it was not the only
facet to catch my eye. I also liked the quick down move, shown by the steep drop in the stock during February when price slipped from about 42 to 32, almost a 25% plunge. I felt that price
would rebound, perhaps do it rapidly, too. The quick decline suggested a Big W type pattern, but this one had a symmetrical triangle as the reversal catalyst and
not a double bottom. As a utility, the stock also had a yield of 5.7%, but with an unknown hold time, it was unclear whether or not I would actually collect it.
Weakness in the market helped push the stock lower and it threw back to the triangle. Notice that the apex at A matches the end of the throwback exactly.
I have tested this in a study of such behavior and found that price turns between 60% (direction change) to 75% (finding a minor high or low) of the time
within 4 days of the apex.
Nicor Stop Placement
Once I was in the trade, I placed a stop loss order at 32.29, 5% below the buy price. This was below the bottom of the triangle and closer than the 31.29 volatility stop suggested.
Even though I could be stopped out on normal price action, I felt that the triangle acted as a support zone, and I would only be cashed out if the stock reversed with gusto.
The upside target was 40 then 42 and 45 with overhead resistance at 35, 39 and support at 30 (see the March 31 post for resistance at 39).
A day after buying the stock, I raised the stop to 32.78, in line with the volatility stop recommended setting. That means it was now safe to raise the stop to 32.78 without having
to worry about being stopped out on normal price fluctuation. The new stop would be just below the price of the triangle's apex.
I wanted to add to my position on April 16, but the stock gapped upward and I was not going to chase it.
On April 19, I raised the stop to 33.36.
On April 29, I placed a buy stop order at 36.03, just above the congestion region that had formed. As luck would have it, price gapped higher and I bought into the stock not at
36.03 but at 36.68! Talk about slippage, that move was back breaking! I raised the stop on both positions to 34.52.
I raised the stop to 36.38 on May 3 and to 36.92 on May 7. By May 12, I was getting nervous. I tightened the stop to 37.92, inside the volatility stop setting. I felt that the
stock would form a handle and I did not want to be a part of the coming retrace.
Nicor: The Sale
A week later, May 19, I decided to sell the stock. On the weekly chart, the stock had reached overhead resistance at the round number 40 and I felt that energy prices were frothy,
a word I used to describe them in past blog entries. I received a fill at 39.03 and made 14.5% on the first trade and 6.3% on the second. As the chart shows, I sold too soon, but that is the way
it goes sometimes.
The chart shows the continued climb of the security after I sold.
Energy stocks, especially natural gas distributors like this one, Nicor, moved higher even as the Dow Jones industrials
started dropping the day I sold, eventually plunging into bear market territory.
In the figure, sold does not point to the price at which the transaction occurred, rather to the day when it occurred.
The stock eased lower to 38 in July before racing ahead and reaching 52 then falling all the way back down to 27 and change in the 2008 bear market,
hitting bottom in March 2009.
-- Thomas Bulkowski
Copyright © 2008-2013 by Thomas N. Bulkowski. All rights reserved. Hillary Clinton Virus: Files disappear only to reappear mysteriously a year later, in another folder.