Friday, January 8, 2010

Bookkeeping: Adding Back to Braskem (BAK)

Thus far Brazilian chemical maker Braskem (BAK) has traded like a slave to technicals.  We began the position on Dec 18th as it fell to support in the $15.40s.  Not 2 sessions later it surprised me by jumping to $16.90 and we were compelled to lock in a 9% gain.  At the time it was approaching early December highs at $17 which most likely would serve as temporary resistance, so as we wrote

I did not enter this position expecting a quick trade, but I am going to take what the market hands us. Since we have such a nice gain in a matter of days, I am going to take profits on almost the entire position and then buy back on (a) a pullback or (b) a breakout over recent highs, low $17s.

As you can see below for about 7 sessions in a row, $17 was a brick wall.  There is no reason for $17 to mean anything (or cause the stock to be stone walled) other than the arcane dark arts of technical analysis. 

Then the stock peaked its head over $17 intraday earlier this week on 2 separate days, causing my trigger happy finger to yearn to hit "buy buy buy" but I held off.  The closing price is always more important than the intraday price... and it never closed over $17 which would of been a positive signal.

Now, the stock has instead pulled back to support (blue line), the same support we bought at 3 weeks ago - the 20 day moving average - although that moving average has moved up rapidly from mid $15s to lower $16s.   We took back our allocation earlier this morning and will try the position on for size again. 

As an added bonus a very clear stop loss area is available - actually 2 of them.  For very short term traders who don't even want to risk a 1% loss you'd want to stop out on any drop below the 20 day (extremely tight stop loss).  Whereas those with a longer term view, and willing to put up with some near term losses have the 50 day moving average (red line) which just so happens to be exactly where lows from 3 weeks ago were.  So not only do you have a moving average sitting in the mid $15s but you have a recent low at the identical spot.  Any stock that breaks to a new low and penetrates a key moving average (together) would certainly have major issues and deserve to go to the scrap heap.  Hence $15.30ish would be a great line in the sand - if the stock fell there, one could add to their position anticipating a bounce - and then stop out on a break below.

We've added today at $16.31 hence our sale 3% higher allowed us to lock in gains and reacquire the position at a discount.  If the stock jumps back over $17 from here, this will be the perfect trade.  Of course there is no guarantee of that, and the stock could falter from here - everything is probability in the stock market and we just put the odds a tad more in our favor.  I'll be adding to the position on a break over $17 if and when, as that would signify a great chance of a new leg up.

If none of that jargon above made sense to you... well that's why you send the check and let me worry about it ;)

Long Braskem in fund; no personal position

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