Thursday, October 21, 2010

CHGS, SHZ : Two stocks with huge moves

I mentioned CHGS in this post. In that post, I mentioned that I had sold 1/2 of the position in the ramp and that I would re-buy if it pulled back in.  Time passed, and it didn't pull back down below from where I had sold it.  Accordingly, I bought back into a greater size than what I had sold.  Yesterday's surge was unbelievably wild.  It is also an example as to how stop losses on the speculative plays can shake you out before the move gets going.

Here's the chart (Click!):

First, note the dip before the enormous break.  If your stop was too tight (10%), then you may have easily been shaken out before the rocket boosters engaged.  Speculative plays require speculative positioning (capital allocated).  I did not have a stop on this as I had my capital allocated accordingly, and I believed that with the technicals and the fundamentals, I had a low risk entry.

Second, I was lucky to be at my desk yesterday rather than at a client.  When the rocket boosters deployed, I systematically went into action--selling methodically into the lift.  I marked in fuschia the prices that obtained. This audacious move with huge pockets of gaps was on 46.5x relative volume. 

I currently continue to hold 15% of my position, and I may add to it. I'm interested in seeing the price action after absorption of the previous move.  For every buyer, there is a seller, and I have more to say about that a little later. This stock may very well go to the moon, and there was definitely a moon shot yesterday--but one has to ask about the sustainability of such moves.

There was other robust activity in Chinese mining concerns, SHZ being another case in point. Let's take a look.  Here's a 30 minute chart of SHZ (Click!).  I do not own it, but I did look and pass on it!

This stock rocketed up on 150x relative volume.  Wowsa!  What is interesting on this stock is that the move was not materially sold down as with CHGS.  I wanted to briefly share my view of "why" with you.  Let's take a look at two weekly profiles with the volume@price bars. No, you will not need coffee to stay awake. (Click!)

Zooming out to a weekly chart, we see two very different profiles.  For CHGS, there were lots of eager buyers from 09/09 through 03/10 that may have taken their eye off the ball and did not get out. Yesterday's ramp was some salve on a money wound, and they became very motivated sellers.

SHZ was quite another profile altogether.  The longest volume bar was cleared and there were no previous buyers at higher levels who would be motivated sellers.

I'm a firm believer of the importance of volume@price bars to understand the complexion of a chart and the stability of pricing a particular points.  I don't use pivots on stocks, but rather I look almost exclusively at this profile which helps me spot strength/vulnerability in different time frames.

Our job as traders/investors is to find high probability trades, allocate appropriate capital, and manage the risk in these trades.  I believe that V@P bars help inform that risk.  To take this one step further, looking at the long V@P bar on SHZ's chart, where do you think that there will be some very motivated sellers?  If the price falls back below the $4.00, there will be some nervous holders.

Position:  Long fractional position of CHGS