By Smita Sadana
"The best of prophets of the future is the past." - Lord Byron
They say hindsight is 20-20. Looking back at the past makes everything seem so intuitive and obvious. However, since the endeavor of our trading is to unlock a profitable future, what role should hindsight play in this process?
As someone who has been trading for many years, I believe hindsight can be an investor or trader's best ally, as long as one reflects on past situations with the intent to learn and then utilize this learning in future trading situations. I often find myself analyzing my profitable and unprofitable trades, as well as missed trading opportunities. Here's a recent trade that worked out quite well.
In a market that has appreciated significantly from its March 2009 low, it's natural to look for value plays, especially to balance the momentum-centric opportunities. However, it is disconcerting to the value investor when an ascending market passes by seemingly good value stocks like Intel (INTC), Cisco (CSCO) and Microsoft (MSFT).
I've seen many market phases when value plays continue to trade listlessly and threaten to become value traps, so my instinct has been to not participate in these until there's a good catalyst that changes the technical picture. When this happens, it can provide the spark for a quick move, thus offering the opportunity to participate in a profitable trade.
The Entry and Trade Targets
Intel recently announced excellent earnings in late April, and the stock gapped up on heavy volume out of a downtrend line. This provided the catalyst I was looking for in this value play.
The trade was initiated below $21. I identified two technical targets for this move. The first target was the vicinity of February 2011 high ($22.14) and the second target was a move toward the downtrend line, around $22.71.
The Exit and Outcome
Intel has been displaying impressive strength since its initial gap up following its earnings report and was more than 10% higher than the purchase price in just 6 days, at the time of this writing. As a trader, I respect such strength, since it could be the spark that pulls this stock out of long-term malaise.
Keeping that in mind, I only exited a partial position when it reached my trading targets, with the intent to add to my current position on a pullback. I often trade with partial entries and exits, since I find that it lets me take advantage of extreme short-term moves while allowing a longer-term position in the same stock.
Here's another look at Intel via Bollinger bands. Notice how it has been consistently walking the 3rd standard deviation band, which is a pictorial representation of its technical strength. In such cases a pullback to the 20-day simple moving average is often bought (currently it is at $20.40, but rapidly rising as the MA encompasses recent action).
However, since many strong stocks do not pull back to their ideal technical targets, I would be prepared to buy a low-volume pullback to the February 2011 high ($22.14). Continued technical confirmation of the bottoming pattern would be a good confidence-builder to look for in assessing the longer-term investing posture on Intel.
Value plays can languish for longer periods of time than most investors are prepared for, so it is often useful to look for a catalyst that can change the medium-term risk-reward ratio and allow you to profit from a good setup. Intel provided that opportunity recently.
Full Disclosure: The writer has a long position in INTC.
About Smita Sadana
Smita is the founder of Sunrise Capital LLC (www.tradervantage.com). After earning her double master's degree in economics, she has been trading full time in the markets for the last 15 years.
Over the years, Smita has developed a unique trading strategy that includes proprietary market timing tools, technical analysis, risk management, market psychology and fundamental analysis to deliver consistent and superior returns, while sticking to her No. 1 goal of protecting the principal investment. Using this strategy, she has built up an exceptional track record over the years even through the severe bear markets of 2001-2003 and 2008. More details available at www.tradervantage.com.
Smita has been featured on the cover of "The Traders Journal" and interviewed in various forums in the financial press. In addition to trading, she consults with hedge funds and writes for Minyanville.com's Buzz and Banter service.
- fundamental analysis
- proprietary market timing
- Intel via Bollinger bands
- simple moving average
- standard deviation
- technical analysis