Trader’s Narrative

Amazon’s amateurish mistake put their exclusive deal with Toys R Us in jeopardy and cost it the quarter along with billions of dollars in equity valuation:

Amazon’s plunge actually took place yesterday in after hours trading (blue circle) but carried over to today’s session. The after hours session yesterday was a tell that we would see anything but a usual day for Amazon today.

And with volume spiking to more than 11 times the expected (purple square), it was anything but usual. If you were really quick on the trigger and wanted to get in on the action you could have watched the pre-market trading and shorted AMZN right at the opening candle.

The last candle in pre-market was a reverse hammer-like candlestick, which after the weak run up meant that buyers had exhausted themselves and a change in trend was probable. It also provided a defined risk entry at its low ($28.70) with a stop at its high - which incidentally was very close to the high of the pre-market trading ($29.01).

The next opportunity to go with the trend and short AMZN came at 11:00 am when price contracted and a narrow range candle offered a very defined risk entry (red circle). Also notice that volume had dried up as price had recovered. From there, price expanded downwards right into the close.

Network Appliance gapped down and broke below $30.30 where it had found support twice previously (on daily chart). The morning volume was surprisingly muted for such a technical deterioration:

The first candle closed down down but left a long lower tail which was a bit ambivalent. The second candle was decidedly more negative, closing at its low and the low of the opening range. The next three candles were each successively narrower in range.

The best entry short was just below the 5th candle (red circle). Price expanded downward again after this brief contraction and reached the Fibonacci extension target.

The downtrend continued, no doubt aided by the general market weakness and the fact that Network Appliance is in the internet/tech sector. Again I saw the ultimate low being put in when volume spiked and when a beautiful hammer was printed with a very long lower tail.

Subsequent volume exceeded the hammer’s volume but I think there’s something to be said for this pattern which seems to signal the end of intraday selling pressure.

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.

PMC Sierra gapped down and fell very hard this morning after receiving a double wammy of a CFO departure (”for personal reasons”) and revenue guidance below analysts’ expectations:

Within the first 15 minutes of trading, price fell 12.4% (from previous close). When you have such a precipitous fall in such a short time, it is highly unlikely that you’re going to get a contraction in the same time period and see the trend continue for any significant further decline.

As I’ve already mentioned, it is more prudent to drill down to a shorter time frame and get in the trade before the trend runs out of momentum. Zooming in to a 5 minute chart presented the low risk entry in the red circle above.

Curiously enough, the decline reached the (15 minute interval) 38.2% Fibonacci extension at $7.48, marked by the dashed red line. This would have been an amazing exit. But a more realistic one would have been on the break of the 12th candle; accompanied by a volume spike. After that, the trend exhausted itself and PMCS meandered for the rest of the day.

By drilling down into a shorter time frame, it was possible to take advantage of the trend with an entry just below $8. Had we continued to look at the 15 minute chart, the only entry offered was at $7.76 - which would have been a scratch trade as price rebounded almost immediately.