Friday, July 20, 2007

Analyzing FTO trade

A reader wanted a more in depth analysis of the FTO trade. The basic principle is as I stated when I made the trade: a pullback to support with a strong confirmation move. Let's take a look at the chart:

The first thing that jumps out at me is the pullback to the 20 day moving average (mid-Bollinger Band), followed by a high volume postive day where the bar prints a long tail and closes at the day's high. This is a very good sign.

Next we move to stochastics. As the stock pulled back, we reached oversold levels (20), followed by a bounce and stochastic crossover. Another good sign.

Finally, OBV (on balance volume), confirms what we see by looking at the volume bars. Volume has been better on up days and there looks to be positive accumulation.

Finally, we have to decide our reward to risk parameters. The most logical area for a stop is just under the tail, around $44. A good target is at the recent highs, around $49. This is a good place to take partial profits, with hopes that the remaining shares will participate in a breakout to new highs.

I will hold this stock until I get stopped out or my target is hit.

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