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

RMBS TRADE

The final example of letting one get away is a trade that caused me to become too attached to an expectation, surrounded by hype over a patent infringement ruling. Rambus, Inc. (Figures 13.6 and 13.7 ) had sued NVIDIA Corp. for a violation of patent rights. Rambus had a very good case, and the overwhelming consensus was that the news would be in its favor. If so, it would be a financial shot in the arm for the company, the reflection of which would show up in the form of a quick boost in its stock price. The announcement was scheduled for Monday after hours.

Figure 13.6 An upside breakout is building.

RMBS, weekly, indicator set #13. Weekly characteristics of the trade set-up:   • Inverted head-and-shoulders pattern (indicated by LS, H, and RS), portending an upside breakout.   • An ascending triangle has formed in the area of the right shoulder.   • MACD histogram and volume are sloping upward (indicated by arrows).

Figure 13.7 False upside breakout leads to a severe sell-off.

RMBS, daily, indicator set #8. Progress of the trade:   • I entered long on a break above the down-trendline at 24.33. Prices continued to rise early in the day but then sagged back inside the triangle (bar A).   • Prices gapped down at the open and weakened throughout the morning, triggering my stop at 23.14, for a 4.8 percent loss. Prices bounced off the up-trendline and surged in the afternoon ...