Trader’s Narrative

It is earning season and Wall Street is merciless when companies lower their guidance. This morning, Connetics opened 24% lower:

Watching the tape, it was easy to see that volume would be unusually high. The selling was brutal, taking the stock down almost non-stop through the whole morning.

Connetics was very similar to last week’s example of PMC Sierra. If you had relied on the 15 minute chart, you would have missed on a huge and sustained downdraft. It really paid to drill down to a smaller time frame.

A good entry on the 5 minute chart was the 5th candlestick - the first one that closed up but which had a long upper tail. The exit was the break of the high of the previous candle (red circle). Eventhough I used the 5 minute chart for entry and exit, I still kept an eye on the 15 minute chart and used it for plotting the Fibonacci levels.

Again, similar to PMC Sierra, Connetics finished its move at the 38.2% Fibonacci extension. Holding through the retracement which started at 10:30 am would have seen a spike in volume and a tell-tale hammer candlestick (purple circles). After this candlestick the whole demeanor of the tape changed. Price stabilized and trading volume slowed down.