Fly Fishing the Stock Market: How to Search for, Catch, and Net the Market's Best Trades

GETTING TRAPPED AT THE EXTREME EDGE

Traders need to get out of the rut. They must not be trapped in a single way of doing things. Many feel stuck in losing trades where greed clouds their judgment and makes them overstay positions until they are squeezed out in a damaging way. This series of charts of NetSuite, Inc. (N) (Figures 5.1 through 5.3) illustrate the entrapment of traders at the extreme edge of a price envelope.

At the time, NetSuite was one of the dogs of its industry group (computer software and services), but it had a very nice technical posture. I expected it to attract the attention of bargain hunters. If a crowd of buyers were to show up, it would spark a short-covering stampede. As shorts had piled into NetSuite, its short interest ratio (short interest divided by average daily volume) reached 12.45, meaning that it would take short sellers over 12 days at the current volume to cover their positions.

The shorts were betting heavily that the consolidation triangle would resolve down. The stock, however, was showing the signs of a likely reversal. It spiked down on the weekly chart (Figure 5.1, area A), followed by a four-week consolidation, changing the Impulse from red to blue (Figure 5.1, area B). In addition, there were multiple bullish signals on the daily chart (Figure 5.2). The Force Index had risen above zero, accompanied by a positive divergence in area D. Finally, there was a bullish crossover of the MACD lines.

FIGURE 5.1 Trapped in a shallow pool.