Trading Journal Notes from Gil and Dr. K regarding this past week's pocket pivot alerts:
China Biologic Products (CBPO)
GM - Thinly traded Chinese stocks always make me nervous. This one had a pocket pivot on what is basically a flag breakout, and I am not a fan of buying into breakouts, especially one this extended. The stock has been able to edge higher, but a big outside reversal to the downside on Friday came on heavy options expiration volume. This might be better to look at if the pullback carries into the 10-day line as volume dries up.
DrK - Volumes are always exaggerated on quadruple witching day, thus a stock should not be penalized for heavy volumes on such a day. A constructive pullback to the 10-day moving average in context with the general market could be bought. Average daily dollar volume is about $25 million so it is on the thinner side but not so thin it cant be considered. That said, the more liquid the Chinese stock, the better, especially in this market environment.
GM - Another flag breakout following a buyable gap-up in early November. Again, I am not a fan of buying breakouts like this, and the pullback into the 10-day line following the breakout makes my point. This might be buyable here along the 10-day line, which offers a much lower-risk entry point, but whether it is able to hold will depend heavily on what the general market does this next week.
DrK - Buying the stock as close to its 10dma lowers the risk. A stop could be placed just under the lows of Friday which would also place it just under its 10dma. Were the stop hit, the stock would then have dropped back into its prior base where it could be sold.
Ligand Pharmaceuticals (LGND)
GM - this is a pocket pivot base breakout from a sloppy base so, again, I'm not looking to buy this on such strength. The stock was shoved back into its 10-day line on Friday, but showed some spunk by rebounding and closing in the upper half of its intraday price range. It seems to me that if you were looking to buy this you had to hold your nose and buy it right at the 10-day line on Friday. If one were going to try and buy this in the face of the weak general market action over the prior two trading days, one would certainly want to use the 10-day line as a guide for a reasonably tight downside stop.
DrK - LGND shows resilience by closing midbar in the face of a heavy down day in the major averages. Had one bought LGND on Friday as it neared its 10dma, you are sitting in a good position as a sell stop placed just under the lows of Friday works well as it uses the 10dma as a selling guide. That said, it is not easy to buy a stock when markets are aggressively selling off as they did on Friday. In such an event, one strategy is to keep a one percent stop under the moving average being used as a selling guideline to keep risk to a minimum while preventing whipsaws. If you are looking to buy LGND, you could either wait for it to trade closer to its 10dma, or alternatively, should markets recover and should LGND show strength not giving an option to buy closer to its 10dma, it could be bought knowing your risk is based on a sell stop placed just under Friday's lows.
GM - The best place to buy this one was on the extreme VDU or "voodoo" pullback into the 20-day moving average six days ago on the chart. The subtle pocket pivot three days ago on the chart also was a reasonable entry given that the stock wasn't very extended from the 10-day line at the time. Friday's reversal to the downside shows why it might have been a good idea to sell into the strength on Thursday since the move from the voodoo pulback six days ago to the Thursday highs was about 10%. In this market, that is a gift that is usually best accepted and banked!
DrK - Breakouts that look obvious usually have not worked in this market environment, so Thursday's strong action could have been used to take at least partial profits. If you did not buy WB when we reported on this stock on November 25, or bought on constructive weakness when it had a low volume "voodoo" pullback for a few days leading up to December 11, you could still buy it provided it is not too far from its 10dma.