Before and After

Option Trading in Merck?

I have been watching Merck (MRK) since yesterday. As you probably already know, Merck stock had a massive sell off in October 2004 related to the recall of one its blockbuster drugs. Since that time the stock has been undergoing somewhat of a consolidation from that huge volume washout.

It is looking to me like the current stock chart pattern being created is an ascending triangle. There was also a huge sell off on about 60 million shares in late January, but then a complete reversal of that and rally on 60 million shares in mid February 2004.

Right now it is hovering right under longer term resistance of 32.5. I like the overall set up and the potential here. The key indication for a breakout from this pattern will be the volume in the days ahead at 10:35, 12:45 and then the final volume near the close. The volume should be the clue that Merck stock wants to make a breakout from this pattern. 20 million shares or greater would be perfect.

I am opening up this before and after case with the following.

Merck May 05, 32.50 CALL

with price 1.15

Target is 2.00

also, Merck Stock

with price 32.3

Target is 35.00

Peace!

Im out.

P.S. My apologies for not hacking up the chart a bit more. I am currently not on my original computer and had to slap up any chart I could find.

P.P.S. There is a steep trendline that I could not draw in the chart that is important to keep this price pattern intact. I will draw it in later, but for now this will have to do.

I am very pleased how this before and after category entry worked out here at the stock and commodity trading forum. When I opened this one up a few days ago I knew it had some potential and am glad that some things can be learned from this case. In many, perhaps most cases, it is a very bad idea to be thinking ‘long’ when a stock has shown persistently strong down trending price action. Stocks need lots of time to build new bases (aka price work) out of such persistent down trends.

There is definitely a time and place to be brave and try to pick bottoms, but before you do so be sure that you have as much evidence on your side as possible. You want to be sure beyond a reasonable doubt that a stock has done enough flat basing and volume work before a new mark up phase can progress.

The clues that existed in DRD Gold

So then why did I open up this before and after case for Drd Gold? The stock was clearly in a very treacherous down trend with heavy volume all along the way. Here’s why:

• There was evidence that Drd Gold elected to do a massive one day selling climax
• As of the initial posting, Drd Gold was at or very near previously oversold WEEKLY Relative Strength Index (RSI) readings
• The actual selling climax day finished the day with a mid range price bar showing me there was already initial demand (more on this in a minute)
• The price action AFTER the selling climax was retesting on very low volume
• The retesting price action had the characteristics of an arcing price action
• A 41 million share day is very difficult to break with ease to the downside with valid volume

Clearly the news was very bad during the time before the ‘news’. Bankruptcy talk, earthquakes, a strong rand that only wants to get stronger (not true anymore). I mean geez, how much worse could the ‘news’ have become?

The Composite Man, the All Knowing Market Force

The question that needs to be asked though is who was stepping up to the plate buying shares of Drd Gold in the midst of panic on that 41 million share downside crash day? Someone must have been buying there. I believe the buying entity there was what Richard Wyckoff termed the composite man. The composite man is the ‘all knowing’ market force that buys the lows and sells the highs with regularity and has unlimited resources and knowledge much better than most typical market participants.

It is useful to think or frame market analysis this way because it can help you get along side the smart money if you look at the market in terms of ‘what would the composite man be doing here’ ?

So if we assume the composite man was buying the lows of that panic sell off day, surely it would make sense that after buying up all that inventory, they would want to defend their position right? Well it appears to me that this is exactly what happened during the last few weeks on Drd Gold.

The composite man was buying up inventory on the 41 million share day sell off ending the day with a mid range close. So naturally, that buying needed to be defended on the retest of the low.

Another interpretation is simply that the panic sell off day met demand as it encountered long term support. No matter how bad the panic, or how bad the sell off, every time price meets long term support (or resistance) there is a very high probability in my experience that it will be met with supportive demand (or weakening resistance) even if price initially breaks through that support (or resistance).

Note in the first chart also the arcing nature of the retest of the panic day. This was additional key evidence of slowing of selling pressure and the gradual building of new demand.

Weekly Relative Strength gave a clue

This next chart is simply an illustration of the weekly oversold level as indicated by the weekly price chart plotted against weekly RSI (Relative Strength Index). Drd Gold definitely has lots of more price work ahead of it before any firm conclusions can be made about the permanence of its price at these levels. However, as I indicated in this previous post, the story could be interesting and worth revisiting as the year plows on.

Note that the last time Drd Gold was able to break it’s long term down trend, it took about 1 full year of cause building before a new up trend could be established. Will it take that long this time too? I don’t know. The bottom line is first Drd Gold needs to establish some sort of a new base (cause building) and break the long green down trend line before anything else of substance can transpire.

Finally the above chart is simply a representation of the over all bigger picture on Drd Gold. You can see that the yellow shaded area represents a secondary price channel. The current monthly price bar, being a bullish hammer is hinting that the price of Drd may eventually be able to climb back within that yellow channel. If it does so successfully then it could imply a move back to 2.5. This premise is based on the simple concept of oscillating stock prices.

Ok, that about wraps it up for this before and after case!

Peace. I’m out.

P.S. By the way, one point that I think I will try to emphasize more and more is the importance of moving on immediately after any target is realized. This could be one of the single biggest mistakes that people make, becoming too attached to what they were originally involved with. This was mentioned as point number 10 here.

I have already given Drd Gold mention a couple of times on here, so I thought why not put Drd Gold into the before and after category for the fun of it on a near term basis analysis. Maybe there could be a lot to be learned from this one. We shall see. Part of the reason for opening this one up is to see if the 41 million share sell off day a few weeks ago was the selling climax.

Highest Volume day on record for this gold stock

That 41 million share sell off day was indeed the highest single volume day ever for Drd Gold according to my research. Yes, the news is horrible right now on Drd Gold. There was even news recently of earth quakes near some of their mines causing them to shut them down. Talk about bad news! geez. On top of the financial difficulties they are having, then add an earthquake in there to make things worse. This is yet again, another great example of the relationship between news and the price. The news is clearly very bad.. Perhaps the only good news that is at least starting to come about is a more supportive rand gold price mentioned in the post previous to this one.

Again, the intermediate trend in Drd Gold is still quite bearish. Strong downward persistent price trend with no real indication of a change in supply demand relationship to the bullish side.

So the reason I am opening up this ‘before and after’ virtual trade is to highlight what could possibly be a shorter term bullish situation within an intermediate term more bearish situation.

One other quick thing I wanted to mention without showing the gold stock chart for it is that the RSI level on the weekly chart is at 26.74, a level only achieved 2 other times going all the way back to July 16th 1999. The other time was November 17th, 2000. In both other instances those RSI levels marked long term price lows for Drd Gold stock.

On the shorter term chart again it comes down to the volume story here. I do not think Drd Gold will be able to break below this 41 million share day swing. At least not immediately if it even were to do so. Price is now drifting down in a slow lazy retest near the low of the high volume swing.

So the virtual before and after setup is as follows:

Entry at .83

Protective Stop at .80

Objective is to between 1.00 and 1.09

Risk is -3.6%
Potential Return: 20 to 31%

Peace.

Im out.

P.S. I can’t wait to put up the price of gold and silver charts (the long term ones I mean). They will probably be some of the most important longer term charts I will have ever put up on here.

P.P.S I am going to officially name this before and after case “Diving Head First into an Inferno”

USTT stock breaks out and starts consolidation

This is the ‘After’ part of my ‘Before and After’ feature on USTT. As it turns out USTT did move out of the ascending triangle pattern and it also did so with sufficient volume to make it a valid breakout.

USTT moves 37% from ‘Steam Kettle Pattern’

Everything about the stock chart setup on March 3rd, 2005 was very good. The only bad thing was the fact that USTT is a very illiquid OTC BB stock that is never a good thing for anyone. However it was worth writing about to profile it as a great example of what I call a ’steam kettle pattern’. I call it a steam kettle pattern because there is a price pattern building under a long-term resistance area with building heavy volume. The volume in this case is the ’steam’ and the price pattern itself is the cause. A lot of the time the price chart pattern that builds under the long-term resistance is usually an ascending triangle. For the highest success rate, that would be the type of price pattern you would want to see. In my opinion this is always a great pattern to watch out for. The problem is that it is also very hard to find and will likely take you many hours of searching. All the right elements need to be in place for a stock or commodity to qualify as a ’steam kettle pattern’.

Anyway, to sum up, USTT did make a valid breakout of the .18 level because it was done with equal or greater volume than the highest volume swing in mid February. This was necessary for the breakout to be valid. Now it appears that USTT is in a minor consolidation pattern and I do not know if it will continue higher here or not. The time to exit shorter term positions is always on high volatility, high volume spikes, especially illiquid ones like USTT. It seems likely that USTT will possibly return to .18 for a retest of the breakout level? This is always a very common occurrence and it is the same type of thing I am currently expecting in another price chart I just wrote about 2 postings ago. If the retest does not materialize then expect a move to next resistance at .28

Peace.

I’m out.

tc

Does Technical Analysis work on the OTCBB?

There has been debate about whether or not Technical analysis works or not on tiny microcap stocks such as those on the OTC BB. I am of the opinion that it does work, however I am also of the opinion that this tiny marketplace is not one to spend too much time on. It is definintely a very illiquid marketplace with much higher risk associated with it.

However, sometimes situations develop whereby an attractive enough chart setup occurs that it warrants mentioning. This is exactly that, an attractive chart setup. The downside is the liquidity issue. It is really horrible on the OTC BB market. Sometimes it can take 30 minutes or more just to get ‘into’ or ‘out’ of such a position. Despite the drawbacks, I seem to have found a very promising setup here.

The way in which I found this setup is very unusual. And maybe it speaks to the fact that a lot of stocks in general right now are moving on speculative merits only? A lot of small stocks that is. Whatever the reason, it is happening and I am reporting it to you.

Now back to how I found this little one… I was browsing through lycos live charts and there popped up a random chart from their server. It was indeed purely random. So there it was, and immediately after I saw it I knew it was worth investigating further. I have a good knack for this, simply looking at a chart very quickly and immediately ‘getting a read on it’. Kind of like you size up a person you meet for the first time.

Anyway, the chart is USTT and it trades on the OTC BB, the relatively illiquid and highly speculative ‘wild west’ exchange. Because I am a firm believer in technical analysis, it really does not matter to me what kind of stock, commodity or index I am analyzing. All the rules of technical analysis apply to each of them.

I have a little bit experience with the OTC BB stocks, so I know how to get a good read on them. I mentioned the liquidity issue above. This is true, yes. But sometimes there are periods that alleviate some of this drawback. For example right now I am seeing significant volume expansion on a number of them including USTT.

Actually the overall chart pattern setup on USTT is extremely attractive. If this were a large or mid cap stock, I would probably rate it a 9 out of 10. The pattern setup looks good to me because what you have here is a 7 to 8 month FLAT base (bottoming process) which is indication to me of accumulation. The high volume spikes within the green shaded area are some evidence of that accumulation. But then also, you have this based and accumulation building up right under a 1 year long resistance area. This one year long resistance area is indicated with the horizontal blue line. These two facts are very important in this analysis. Why? Because in my experience in technical analysis and reading stock charts over the years, this pattern identification is one of the most attractive stock chart pattern setups you can ask for. The reasons for this are simple. Number one, you have a stock that has shown us that it has completed its base during which there was accumulation. Then you also have an indication of a sign of strength with volume that takes price to a new level and holds that level. And, as you will see in the chart in the next paragraph or two, we also have an ascending triangle formation building on a nearer term basis ( a highly reliable chart pattern) right under the long term resistance line (long horizontal blue line). All of these factors together create a high probability breakout situation.

One other thing to mention is the weekly macd histogram. The weekly macd histogram shows a bullish divergence with price from the period of early 2004 until present. And, it also looks as if it is just about to crossover above the ‘zero line’ on the top half of the chart above. As I have said, I have seen these patterns many times before and I know from experience that they are high probability patterns. The fact that this is an OTC BB Stock does tarnish the setup a little bit, but nevertheless, in terms of strict technical analysis, the attractive setup still exists.

You can see from the next chart below more clearly the price pattern and the volume expansion as well as the ascending triangle. The dotted blue line represents the increasing demand meeting the fixed supply of the dotted red line. There is not much room left in the apex of the triangle, and USTT must either break down or up from this pattern. Heavy volume expansion would be the big clue that a breakout is in process. My forecast is that USTT will breakout upwards from this ascending triangle pattern.

It is also interesting to note that this company is somewhat of a play on the alternative energy theme I had mentioned in a previous post. Apparently they make an energy efficient vending machine accessory, saving buyers hundreds of dollars yearly. Another little hint about the speculative interest is the number of message board posts on USTT. I do not read or visit stock message boards, but in certain cases it is worth it for the sentiment side of the setup. The message board for this one at ragingbull.com has a high frequency of posts indicating ‘highly speculative fever’ if you will. While not mandatory, it is a useful indication of level of interest.

So in summary, USTT above .18 will probably launch into breakout mode for between 25 to 50% return potential.

P.S. I really don’t want to mention any more of these tiny ones for some of the reasons I mentioned above. But for now I am letting this one slip through, simply because of the unusual way it came to my attention. It did after all create a good story to write about…

P.P.S I am putting this post in the ‘Before and After’ category to see how this one shakes out. It should be interesting to follow up on.

I did not get a chance to post this chart 10 days ago. But I wanted to as the first entry into the before and after category. Before and after seems to be a decent way for me to look at any stock or index setup, make an observation on it or prediction, and then see if I was write or not. That is the purpose of this category, as a means to learn. Instead of just talking about a stock or position, it seems to be a good idea to revisit it and see how it played out.

As a special circumstance I am going to have to post both the before and the after chart in this one post. However, if you look at the first chart you will see based on the date associated with the price bars that I had made and recorded my initial observation on 2/11/2005. So what is the big deal with AIRT ? The big deal is that it shows a very good example of why it is so important to pay attention to volume analysis when you are watching stock prices.

If you do not use volume analysis in your trading, then in my opinion you are at a disadvantage compared to other traders. Volume analysis is indeed one of the secrets to long term successful trading in my humble opinion.

I noticed the AIRT stock chart after browsing some of the most actives during that day. Notice the three red arrows I drew pointing to three individual price bars on the upward advance in this stock chart. Then, take a look at the volume bars that correspond with each price bar.

This is more clearly seen in the second chart where I have labeled the three price swings ‘a’, ‘b’, and ‘c’ colored in blue. Notice that price swing A had volume of 5.6 million shares, price swing b had volume of 4.4 million shares. Ok, lets stop there for a second. That is a 21% decrease in volume and yet the price of the stock closed above the A swing. So what does this mean? Well for starters it means they were able to push the price higher on much less volume. They were able to close the price higher which is still a good achievement. However, the fact that volume dropped off 21% is a distinctive warning sign that the move was not real. It was ’smoke and mirrors’.

It is possible for any stock to keep trending higher on less and less volume, but in terms of technical analysis, it depicts a supply/demand situation that is growing internally weaker over time. Always look for volume confirmation on stock movements and compare the volume expansion in terms of percent comparisons between previous swing highs or lows.

Point C on the chart was only 2 million shares and guess what else? Not only did point C test price swing b on a whopping 54% less volume. But it also proved the point by closing back under the close of B. At point C in the stock chart anyone who is thinking aggressively long is in big trouble… all the warning signs are there. This pattern may also be referred to as ‘Three drives to the top’ I believe as the veteran market guru Tim Ord calls it.

Anyway, point C was a bearish spring, and provided a clue that AIRT was likely to move back down to the gap, the last place where the real volume was (read demand). That is exactly what it did! A superb before and after example.

TC