Friday, February 02, 2007

KKD - A Trading Lesson

I mentioned in my wrap yesterday that I lost KKD on a stop loss and I wanted to show you some things about that stock that serve as warnings in general. In other words if you see this kind of action look out.

First last week I saw the unmistakable signs of a top in KKD as shown below but I was thinking about holding this stock as a short term investment so I ignored the sign and decided to wait it out.

This sign was followed by a down day and then several Doji candles. I was away from my trading station on 1/31 when the big drop occurred or I would have sold before I hit the stop (I always put a stop in when I travel).

But I did want to show you how you can use the VIX to inform your short term swing trading. The charts below link the KKD and VIX 2-hour charts over the past several weeks. You can see how the KKD reacts to the VIX even the VIX is more attuned to the major indices (SPX).

At point "a" the VIX, having just tagged the upper Bollinger in the first two hours of trading begins to fall away. At the same time KKD, even though it is at the top of the bands (a bad place to be normally) continues to rise. You can see the top clearly annotated on these charts and even though the VIX continues to fall after tagging the lower band KKD also begins to fall. This would be a good indicator that the run is over and if you aren't looking for a longer term relationship you should exit now ("b").

But then something strange happened - the VIX ascended and KKD went sideways. Then at "c" something even stranger happened, the VIX did a rapid descent and in the next two hour period KKD also did a rapid descent. If you didn't get the message initially, it should be clear now - KKD is done for awhile.

The message is clear - if the VIX does something and your stock doesn't react to that move correctly you probably need to review the bidding and take your profits and run.

Now both the VIX and KKD are moving sideways. I'll be watching KKD as it reacts to the VIX and if it starts behaving normally again I'll probably reacquire when the time is right.