Saturday, July 9, 2011

Trade Update: WFC

On Friday we went short Wells Fargo Corporation WFC, at $28.17. When I first saw the chart I thought I would wait for Wells Fargo to get under $28 before going short, but then I saw something that made me take half the position above $28. Which is why I posted that it was a risky trade. The reason we took only half the position was to mitigate that risk.

First look at the 52-week chart. You can see the breakout above $26 back in November of last year. And you can see where it bounced off of $25 zone last month. That action forms roughly a double bottom at the $25 zone, and you can see the nice straight trend line formed by the recovery from there to just above $28 where it closed on Friday. In my mind that trend line would not be clearly broken unless the shares ducked under $28. And therefore shorting under $28 would have been the safe strategy.

Now take a look at the intraday chart in the fifteen minute time period. Pay particular attention to the trading of the last three days. You can see how the high on Thursday which was just underneath $29 per share gives you a nice visible ceiling on your short positions. In other words if Wells Fargo is going to decline by any appreciable amount, then it should not break above $29 per share. In fact Thursday of last week may prove to be an island turnaround.

Whether or not that turns out to be an island turnaround is immaterial. I am not trying to read the future here, we will take it day by day. We will add to our short position underneath $28 and we will cover it back above $29.21.

No comments: