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

THE PERFECT STORM: 2/5/10

This trade was like a perfect storm. As the share price swirled through the triangle, many bullish signals became apparent near the apex, leading to a low-risk/high-reward trade scenario (Figure 12.12 ).

Figure 12.12 RCII monthly chart.

Fundamentally, the company is well managed and growing earnings through cost-cutting and strategic store closures. Historically, the price had built momentum prior to the company’s earnings release, similar to this occasion. Two quarters ago, they beat and the stock ran up. Last quarter, the stock ran up to the down-trendline, sold off the day before they announced, and then continued to sell off the next day on the announcement. This time, however, the stock ignored general market weakness and seemed to cut its own path upward. Friday’s big move out of the wedge on three times average volume tipped me off that too many got a sneak peek at the results to be announced on Tuesday. Hedge funds can bait and switch to give the illusion that a company will beat, but not usually with the amount of volume that overcomes significant resistance.

The technical picture was very unique. Symmetrical consolidation triangles were evident in all three time frames (monthly, weekly, daily) and were breaking out on large volume. The January bar on the monthly chart had traced a bullish engulfing bar (bar A). In addition, the weekly chart ...