Trading Lesson 11-13-2009

Trading Lessons are a feature here in The Bandit Hideout where we take a look back at a trade and see what we can learn from it. It might occur weekly, or more or less often, and it may be written or video format.

It might have been a winner which paid us nicely, and we’ll want to know what it was about that play that worked so well for us. Or it might be a trade which performed poorly for us, thereby offering us another valuable lesson which we might can apply going forward.

Whatever it is, the aim is to use the old ‘hindsight is 20/20’ adage to our advantage. We can learn a lot from the past! There’s no reason to ignore it when it can help us improve as traders.

Trading Lesson for 11-13-2009:

This past week, I liked how MON was acting. The stock had been trending lower and after validating the $70 level as support in July and late-October, it has bounced back lazily to that area and failed to clear it.  The bounce had also created a bit of a bearish wedge beneath that broken support level, setting up what I felt was a good potential play on the short side.  It was a bearish pattern within a downtrend, which is exactly what I like to see.  Here’s the chart I highlighted with the play:

Chart courtesy of StockFinder

I took the short entry on Tuesday as MON undercut the $68.70 level with the break of the rising trend line, but there was no follow through.  The stock bounced back a bit to stabilize within its wedge pattern once again, but it did remain negative on the day.

Mid-afternoon, MON exploded higher, quickly reaching my stop loss level to take me out for a 2.6% loss.  The loss itself wasn’t bad, as that’s a manageable amount which can easily be recovered.  The unnerving part was how sharply the stock rallied, indicating not only had the direction changed with force, but that something fundamental was behind it.

Indeed it was, as the company had just reaffirmed their guidance for fiscal year 2010.  With the new confidence that the company could perform well in the year to come, investors piled into the stock and took it quickly higher.  Here’s a look at MON after the day’s trading:

Chart courtesy of StockFinder

Trading and holding stocks involves risk, and this MON trade highlights one of them, which is fundamental news from the company.  It was not scheduled (they had earnings and their conference call a month prior).  The inability to see it coming means it cannot be avoided, and it’s just one of those things that can occasionally happen.  I did walk away being reminded of a couple of key lessons though.

First, it’s crucial to always have a stop in place – just in case.  I never know when the landscape might suddenly change, so I always want my safety net in place in the event that things shift suddenly.  In this case, I didn’t have much time at all to react, as the stock was sent flying and I was short.  But my resting stop loss order was in place, and it eliminated the need to think quickly in the heat of the moment.

Second, sudden headlines are going to occur, and they may not always be negative.  Just as in this case the news had an adverse effect on my position, down the line some other stock may have a very favorable reaction to unexpected news.  It’s my view that over time, the headlines will even out, so while I was caught on the wrong side of this one, the next one might be an unexpected gift.

Getting taken out of a trade abruptly for a loss can be irritating, but it’s going to happen sometimes.  Some stocks will work quickly, others will fail quickly.  The key is to keep taking the good plays as they come, and let the law of large numbers work in my favor, trusting that technical analysis will do its job.

Trade Like A Bandit this week!

Jeff