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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Here’s a short video from Adam Hewison going over the intra-day 15 minute chart of the S&P 500 Index (SPX). Watch it, then read my comments below:

As Adam mentions this is a very common pattern. The way I would trade it would be to go short as price comes back up from below to the resistance level (the level which used to be support but was broken to the downside).

The all important stop loss - never forget it! - would be placed in the middle of the two extremes, say around 835. And the target, as mentioned in the video would be 812.

My logic is that a breakdown rarely happens without a retracement. So I’m trying to enter into this shallow retracement, which may even take price above the new resistance line. But if the double top is valid, then price will break down anew. As well, I would be short because of all the myriad reasons I’ve outlined in the past few days on where the market is right now. I’m assuming you’ve kept up with the required reading

How would you play this? where would you enter, long or short? and where would your stop loss and targets be?

If you’re interested in patterns, then check out “The Great New Pattern“. And GNP with another specific example (VNT).

Trading is basically about finding and exploiting patterns which don’t change. Why don’t they change? Because we humans, as participants and creators of the market, don’t change.