Trader’s Narrative

Yesterday after the bell, Microsemi released their quarterly earnings report and gave positive guidance for the upcoming quarter. This morning, propelled by that news and upgrades, their stock gapped up above previous resistance on the daily chart:

The first candlestick was a wide range bar which expanded price 4% from $24.67 to $25.64. The second candle was narrow range and closed down. But price remained above the top half of the first wide range candlestick. The third candle was an even narrower range candle which closed down. At this point price had contracted quite a bit and I was expecting it to expand higher and continue.

A long on the break of the third candle’s high was triggered. However, price quickly fell leaving a reverse hammer. Oh-oh. The following candle took price below the stop loss and much lower. Obviously the momentum was over as by mid-day MSCC had touched the low of the day.

So what happened? Why did this setup fail?

Perhaps the first long wide range candlestick was simply too wide range and spent all the fuel in its initial surge.

But then, look at Celestica:

Celestica opened on a gap up and continued to run higher. On the first candlestick, price rose by 6.5% ! That’s significantly higher than Microsemi’s first candle run. But in the case of Celestica, momentum prevailed and price continued to climb much higher.

One possible entry was the break of the second candle’s high (green line) which was also just clearing the opening range’s high. The second entry was on the contraction that followed shortly after (green circle). On a daily chart by the way, Celestica had a weaker gap up since it hadn’t really cleared previous resistance. But just like Microsemi, its gap up had broken the downtrend of late.

So why did Microsemi’s intraday pattern fail while Celestica’s succeeded? I don’t think it was anything more than just happenstance.

Beyond a certain point, fine tuning a setup in order to increase the win rate is futile because nothing is guaranteed and nothing has to always work in the markets. Searching for certainty in an inherently uncertain environment is a disasterous endeavour. That’s why money management and risk control are paramount.

By the way, had you taken both trades, one would lose you 1 R while the other made you around +4 R: net +3 R. Not bad.