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Aaron Lynch Last year EBAY listed on the NASDAQ and in the US, was a darling of the markets. Starting 2004 at $63 and closing the year at $116 nobody could argue that the rise of EBAY was impressive and some great ABC trading was possible last year. Another interesting point regarding US stocks is that as they reach the dizzying heights of the psychological $100 mark the pressure for a stock split starts to gain momentum. An announcement was made recently that the split would occur in February this year.
During the same announcement on January 20, EBAY made their profit updates to the market, a 44% jump in earnings was met with disappointment by the market, the chart below shows the price action for the last 12 months and the gap down after the announcement.
Chart 1
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Technical analysis is my preferred method so chasing news and fundamental data is not something I spend a lot of analysis time on. Looking at the trend in 2005 and using our swing charts it's safe to say that the trend is down. The chart below shows us the swing overlay over the bar chart and the recent ABC trade on the short side. The ABC trade that is signalled is not really the focus of this article; suffice to say after such an oversold AB range you might have let this one go. I wanted to focus on the price action leading up to the price gap.
Chart 2
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Coming off the highs in December last year the first lower swing top in January would have been a safe place to enter. The reasons behind why I liked the most recent highs, unfortunately cannot be covered in the scope of this article, for those more advanced SITM traders you might want to take a look yourself for repeating ranges into the high, the Tubbs swing rule on the bearish run in June/July 2004 and also David’s favourite tool time by degrees.
Armed with the information that a top might have formed and applying the swing trading rules that underpin our trading methodology, you could have been hunting around for a trade. Now let’s begin by saying that your software is not going to signal this trade, so understanding your swing trading rules are essential for this entry.
The chart below shows the manual ABC tool and the point I have selected as my reference point. The day I am calling Point C is a higher top and higher bottom. To enter the trade legitimately we need a signal to turn our swing chart down. The following day was an inside day marked as number 1. This did not signal an entry but we know that we could have raised our entry point in this case. Day 2 was a higher top and bottom, but did not take out the top of the day we are calling point C. The entry was confirmed on day 3 with the outside day confirming the lower swing top. We were trading with the trend and well within our entry limits and could have taken advantage of the gap that came the next day.
Chart 3
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It is not possible to always accurately predict how a market will respond to an announcement. I have found that trading with the trend leading into the news with a strong view of the big picture will often lead to good results. Finally I have said many times the software is great, however, knowing the rules and being able to hunt for trades with knowledge is a powerful thing.
Good Trading
Aaron Lynch
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