Trader’s Narrative

I was watching Research In Motion (RIMM) because it had recently gapped up. But since it trades at the same time on both US and Canadian stock exchanges, I also compared the US and Canadian charts (technically RIM also trades on other exchanges but they are in different timezones). In any case, here’s the US version:

And here’s the Canadian version:

The contrast between the two is obvious. Sure, there are a lot of gaps in RIM’s chart but the ugliest one occurred in late September 2008 and represents some serious resistance.

In the Canadian version of the chart, the current price had already bumped its head against this resistance. But in the US version of the chart, that resistance was still a few notches higher. Considering this much resistance so close, as well as the fact that prices had gapped up recently and we were probably looking at an exhaustion gap, and finally, considering that the market in general is heavy as I’ve outlined before, my conclusion was to watch for a decline if RIM broke $60.

Although I was expecting price to breakdown, it actually went up. That’s the really interesting thing here. Today RIMM gapped up (again), easily piercing the ~$65 resistance that had held it in a plateau for the past few trading sessions. Price was not only rocketing higher, it was being fueled by a massive amount of volume:

There was a textbook intra-day pattern: thrust through resistance, shallow pullback, hammer candlestick and lift-off!

So what’s the lesson? At first I thought it was to have more than one plan going into the day. But then you can’t really prepare yourself for every single contingency can you? For me, this is a lesson in humility and detachment. A great opportunity to practice both mental and emotional flexibility. When you’re wrong, you’re wrong. Don’t argue with the chart. Instead, let it be your guide. And do your best to keep up.

Interesting & Irrelevant Factoid: I remember a short presentation that the founder of RIM gave to my university class when they were still in their “garage” stage of development. My prof knew Lazaridis and he thought RIM’s product (in alpha stage back then) was so cool that it should be introduced to its eventual users. To be honest with you, I wasn’t too impressed, probably because I didn’t understand half the presentation. Not too long ago, while in town again to visit my Mom, I bumped into Lazaridis at a local book store. He’s a really nice guy, a family man, very down to earth.

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While you were watching the news about the AIG bonus dustup, hope you didn’t miss on AIG the ticker symbol. It is still kicking around on the NYSE and as a penny stock, it put in an impressive wide range day:

I have no idea why it jumped on Monday since there wasn’t really any news (other than the bonus fiasco). But a 66% jump (from last week’s close) is juicy and as a daytrader, even if you can catch a fraction of it, you’re set.

Even if we ignore Friday’s close and only take it from the gap up open on Monday to the close, it was a 36%. Not too shabby. The intraday high at the magical, round number $1.00 - something really special about round numbers that acts almost like a magnet. The more you watch it, the more you see this stuff.

You don’t want to chase a runaway train so watching for an entry point is crucial. A great, low risk entry point was available at around 10:20 AM (green arrow). Price action paused and then retraced slightly with volume dropping off. If you notice, there was some resistance at $0.60, which was then broken to the upside. This then would have acted as support. So placing a stop under it would have allowed you to define your risk levels intelligently.

No one really knew, of course, that this would turn out to be a huge wide range, trending day. But the tip-off was the incredible volume, as well as the large gap up open. AIG had already put in a bottom last week and rallied impressively already from its low of $0.33 so there was something afoot.

Yesterday I wrote about utility stocks being on sale. Today most of them gapped up in a technical snap back but finished the day poorly.

Still for nimble traders there was ample opportunity to take advantage of the short term oversold condition in this sector. Here are two charts from FPL Group (FPL) and Entergy (ETR) which are representative of what happened in this sector today:

We still have quite a ways to go to fully work out this oversold condition. Eventhough it won’t be straight up to new highs, this sector bears watching. Especially the high prices stocks which present good low risk opportunities when they contract in range and volatility.

Just so we’re all on the same page… on February 27, 2001 the SEC, at the behest of the NASD and NYSE, instituted a set of restrictions which limited daytrading to those accounts which hold $25,000 or more. To mitigate the outcry, they allowed 4:1 intraday leverage (before we only had 2:1).

This came to be known as the Pattern Day Trader rule (PDT):

Anyone who wishes to buy and sell a security four or more times in any five consecutive business day period must have $25,000 or more in their account.

But… if you really, really want to daytrade and just don’t have $25,000 lying around (or maybe you have the sum but prefer to use it elsewhere) there is a way to get around this law. The key is that this is a US law and it only applies within the US. If you open an account with a foreign broker who has chosen to not apply the PDT rule, you’re free to trade as much as you like with a lower balance.

I’m sure there are many. One that I know of is Alliance. I have never used them myself but have heard good things about them from other traders. They are based in Jamaica and are registered with the regulatory authority there (Financial Services Commission).

As far as I know, they are not registered with any US regulatory authority. And go to great lengths to not (appear as though they) actively solicit customers from overseas. But if you apply and open an account, they won’t turn you down. I guess it must be that world famous Jamaican hospitality.

The biggest advantage is that you can open a margin account with as little as $2,000 US and get 4:1 intraday leverage (!). Another bonus is that you can short on a downtick! The downside is that if anything goes wrong, you are subject to Jamaican law. And there is no SIPC insurance. There’s also the not-so-cheap commissions (about $16 round trip for 500 shares). But if you ask them nicely, you can negotiate the rates down to a more reasonable level.

As always, perform due diligence. Don’t take anyone’s word for anything.

My expert opinion is that it is perfectly legal for a US citizens to have an account with them (but since I got my Doctorate of Jurisprudence at Regent University I know as much about the law as a small, forest dwelling, rodent).