Bagged an 18% Whopper and First Trading Mistake of the Year

A Change in Strategy

In prior posts, I spoke of how changing startegies can create a downward spiral that can be extremely frustrating and hard to pull out of. Therefore, I pick my changes in strategy very carefully. For a while now, my philosophy has been to get into the best possible position I can once per week, every Monday morning. I held 12 stocks at a time and closed each position exactly 12 weeks after having owned it. That way, I always had 12 stocks in my portfolio, and opened one and closed one position per week. Now, you may be asking, well, where are all the sells? Well, I only started blogging a couple of months ago, and to tell a story with continuity, I didn't want to report the closing of positions I opened before the start of the blog.

Now I have been watching my postions very closely trying to predict where they are going, or at least where a good gain can be had or a bad loss can be stopped. I'm pretty tired of being right only on paper and not doing anything about it. As you will see below, right now is a moment ripe for a pullback as well, and that has obviously gotten my attention, being at my maximum long position (75% long). So, from here on, I will analyze each holding every week and determine if I think its trend is done or if it is overextended. If so, I'll sell it. You'll see below that that's what I did with Burger King.

One last thing, full disclosure, the reason why I being so regimented about all of this is that although I know quite a bit about technical analysis, I will not delude myself into thinking that the gambler in me is gone. I have had some interesting obssessive episodes with the market in the past, and this is an awesome way to prevent it. I am, in fact, still preventing it because I still am dedicated to only entering one position per week. I am just giving myself leeway to close those positions before the 12 weeks are up.

The Broad Market - Overbought, Ready for a Pullback

Whenever people ask me to predict where the market is headed, I refrain. I am human and know that humans are not very good at this thing. However, at a point in time, you can place moments where the odds are stacked against you. I don't know how far the market will pull back once it pulls back. What I do know is that the odds are extremely favorable for it to pull back. There is classic divergence in the Relative Strength Index (RSI) of the Wilshire 5,000 index. It's there, plain as day. It's diverged and now is trying to make another run over the past two trading days. Notice how the volume is sinking as the index attempts to make a new high. Maybe the market does go a bit higher. This is further manifested in the flattening out of the Accumulation/Distribution (A/D) line. Look how it's failed to make a higher low even though the price did. After all, we're close to a key Fibbonaci level, and markets tend to like to gravitate in that direction, but you're staring danger in the face by seeing divergence like that and simply doing nothing about it. I'm looking for gains to take.

Sold Burger King Holdings, Inc. (BKC)

In my hunt for a prime sell candidate, the steepness of the price line for Burger King was a clear signal. Also, looking at the RSI gives divergence in progress. Yeah, I could have waited until next week for the divergence to complete, but really, with this steepness, on a good market reversal (which again, I think is imminent) you can lose half your gains in one day. What's more, I was seeing divergence in the A/D line. Not a downtrend yet, but I wanted my gain. I bought BKC about 1 1/2 months ago. I was sitting on about a 17% gain. It just made sense. I got lucky with an analyst upgrade as well this morning and ended up with 18% of gain instead. Not bad.

Rackspace Hosting Inc. (RAX) - My Favorite Mistake?

I am pretty excited about finding RAX to short. It's a prime candidate, for sure, except for the fact that I wasn't ready yet. As of last night, it was sitting at support of $17.90. Now I usually want to see a stock break a support or resistance point by at least 3% before I'm willing to enter the position. So I entered a short stop limit order at $17.36 . . . or so I thought. What I really did was set a short limit order at $17.36. I've done this type of thing more times than I can remember. Just plain old carelessness is the problem. What's the difference? Well what I meant to say with the short stop limit was "don't enter the position until the price crosses $17.36." What I said with the short limit was "I am willing to pay anything above $17.36." Remember, we're short here, so the higher the price, the lower your investment. So I'm the proud unintentional shorter of RAX. While I can't stand stuff like that, I'm staying short because the argument is pretty darn good to stay in the position, especially since it was down .45% today to $17.82, which breaks support in an up market, but not as much as I would like. Again, I wanted it at $17.36. This is a foul. I'm in the penalty box, but I'm apprehensively excited to see what happens.

RAX Fundamentals (Courtesy of Yahoo.com)

This one has all kinds of fundamental arguments for dumping it. To begin with, overvalued, overvalued, my Lord this thing is overvalued. The price/earnings (P/E) ratio is over three times that of the industry average, and the price/earnings growth (PEG) ratio is almost twice the average. To begin with, it's at 2.24, and 2 is considered high. Not really that exaggeratedly high, but again, when you compare it to the competition, it's rich.

Now let's look at insider transactions and institutional sponsorship. There have been 91 transactions in the past 6 months, and I can't find one legitimate open market purchase. Insiders are dumping shares. Institutions (the big boys everyone loves to hate these days) also have dumped 13.4% of their holdings last quarter. So the folks who know (insiders) and the folks who move money (the institutions) are all giving this one the thumbs-down.

Finally, analyst opinion on this one is just to darn cheery. You've got 7 strong buy, 12 buy, and 3 hold. Not one underperform or sell. RAX is a stock ripe for downgrade.

RAX Technicals - Weekly

There was already divergence in the RSI a long time ago, that's in the rear-view mirror. What we have now is a head-and-shoulders formation coupled with the breaking of support on on upward channel line. Those two elements of support resided at $17.90. You can see the long red channel lines and the shorter red neckline of the h&s pattern. The neckline was broken today, not enough for my taste, but broken nonetheless. What was also cleared was the level of highest volume for the stock since its IPO in mid-2008.

Stochastics aren't telling me much. You can see price relative to the Wilshire 5,000 has been underperforming the broad market. Now the one that makes me quite giddy (am I a friggin' geek or what?) is the slope of the A/D line compared to the slope of the neckline of the pattern. The neckline slopes upward. The A/D line slopes down, saying that while the price of this stock is fighting to stay in uptrend, behind the scenes, shares are being dumped. Usually what this means is that those who know are heading for the exits, leaving the less sophisticated folks holding the bag when the stock falls out of bed. That seems to be less than 2 weeks away. At the rate this stock is being dumped, someone knows something.

This was a long posting. I'm tired. If you go take a look at the daily chart, there's nothing pretty there either. Sorry to bale on you, but me needs some zzzz's!

As usual, thanks for reading!

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