LONG AER

[Pascal]

AER is a leasing company. It has been weak with its sector, but the LER numbers are strong and I believe that a breakout above $40.25 on volume can be bought. Do not buy above $40.55

28006

28007

28004

28005

[77seas]

Pascal

Now that the 5 day holding period would be over tomorrow, how would you reevaluate the trade? Would you use the breakout calculator with new data or just look at the price action over the 5 days and interpret in the context of the previous output of the tool?

Thanks

[Pascal]

Pascal

Now that the 5 day holding period would be over tomorrow, how would you reevaluate the trade? Would you use the breakout calculator with new data or just look at the price action over the 5 days and interpret in the context of the previous output of the tool?

Thanks

This is a very good question and I was hoping that someone would ask it at some point.
The answer is critical for good trading: Is the trade still good. If yes, should I increase the position? How do I analyze this situation?

The first think is to try to reply to the following question: if I had no position in this stock, would I buy it here?

The stock is pulling back close to the breakout base, but it is not collapsing. It might collapse, but that would probably be a market or sector related issue.

28086

At the close of yesterday, the Pyramid data did not look good. This is a negative.

28085

What I then do is use the Breakout Calculator with the data of yesterday's close to test a pull-back to the 39.93 level on the next day ($39.93 is the price that I see in RT right now). To do that, I need to play with the entry level until the entry price reaches 39.93.

Because my stop is 39, I used that as a stop.

I could have used the setting type of "PB" for pullback, but this setting only considers prices that are above the 50MA for long positions. Hence, I used the setting OS (Oversold,) which does not look at the 50MA at all.

The results are shown below: They are negative. I should not buy here.

28084

After that, it is also a matter of portfolio. My portfolio is 30% long and 20% short. If I sell AER, I would be 10% long and 20% short. I will probably wait for the FOMC statement and decide at that point.

In the current situation, with market weakness, I would prefer to raise the stop to 39.5 from 39. This means that I would give a chance to the stock, but I might as well sell it as the breakout did not succeed.


Pascal

28087

[Pascal]

I sold at 39.84 for a 1% loss.

Market in general is too negative


Pascal

[Mike]

Paying too close attention to an automated trade recommendation without looking at a chart can be dangerous. The breakout calculator works mostly on stocks that are continuing a trend. There are however some patterns that indicate a possible trend reversal where the calculator could be expected to give a wrong steer.

An AER-long may not work because it has come right into a prime shorting region in a head and shoulders pattern. One hallmark of a good shortable head and shoulders pattern is heavy selling on the right side of the head, AER shows this. This indicates institutional selling and perhaps a change of opinion. A second hallmark is that the right shoulder lows undercut the left shoulder lows, AER shows this. The prime shorting place comes in the right shoulder region usually after 2 to 4 rallies on the right side usually up around the 10-week moving average. The short trigger is a stalled rally into the 50-day or failing the 50-day if the rally has broken above the 50-day. This trigger is occurring now on this rally or possibly the next one. We have arrived at the second rally shorting point. With the strong EU liquidity injection situation I don’t really expect the AER short to work (liquidity might establish a floor) but I wouldn’t expect a successful long position to be a high probability outcome. see chart below...

28089

[77seas]

Many thanks to Mike for the classical pattern analysis. Actually the BC Tool also confirms that the probability of success of a short trade is higher (thereby - the chances of failure of the long trade is higher).

While Pascal sought a response to the following question: "if I had no position in this stock, would I buy it here?", I sought the answer to the question " If I had a long position in the stock, should I sell it now". So in the BC tool I used the data till 01/27 (identical inputs for Pascal's analysis). I used a hard entry price as 0% of 5D MA - which is close to the closing price of 40.36. I used arbitrarily a stop of 41.00 ( Pascal- what is your thought on this?), and these are the results i got:

Input data

Entry Level from the short term MA 0.00%
Days for probability evaluation 100
Stop Level 41.00 1.65%
Target Profit/Loss Ratio 6.50 10.73%
Short Term Average 5
Expected holding days 5
Trade Direction Short
Long Term Average 50
Trade Type Bounce


Results for AER, Short Trade - Bounce to Resistance

Probability to hit entry price 98.00%
Next entry price 40.33
20D ATR 2.23%
Probability to hit Stop before Target 29%
Occurrences for stop 2 of 7
Position Size 100%
Probability to reach Target before Stop 14%
Risk/Return Ratio 4.43
Target exit price for max R/R Ratio 36.01
Expected profit per trade 1.96%
Envelope 3.60%


Strategy Analysis for AER

Calculated strategy profit for past 100 days 13.73%
Calculated B/H Trend profit 13.39%
Ratio of invested days 26.00%
Ratio of B/H Profit Captured 102.53%
Strategy efficiency 3.94


So clearly the chances of success of a short trade is much higher, and I should have sold my position at today's open.

Thanks

[Pascal]

Thank you Mike.
It is always important to look at a different point of view.

Pascal


Paying too close attention to an automated trade recommendation without looking at a chart can be dangerous. The breakout calculator works mostly on stocks that are continuing a trend. There are however some patterns that indicate a possible trend reversal where the calculator could be expected to give a wrong steer.

An AER-long may not work because it has come right into a prime shorting region in a head and shoulders pattern. One hallmark of a good shortable head and shoulders pattern is heavy selling on the right side of the head, AER shows this. This indicates institutional selling and perhaps a change of opinion. A second hallmark is that the right shoulder lows undercut the left shoulder lows, AER shows this. The prime shorting place comes in the right shoulder region usually after 2 to 4 rallies on the right side usually up around the 10-week moving average. The short trigger is a stalled rally into the 50-day or failing the 50-day if the rally has broken above the 50-day. This trigger is occurring now on this rally or possibly the next one. We have arrived at the second rally shorting point. With the strong EU liquidity injection situation I don’t really expect the AER short to work (liquidity might establish a floor) but I wouldn’t expect a successful long position to be a high probability outcome. see chart below...

28089

[Pascal]

Great analysis!!

This is the way to use the Breakout Calculator: it is a tool to test hypothesis with real data.
Regarding your question for the stop level, this depends on a few factors such as your general portfolio and the level of loss you can go through. I use to take a maximum of 5%, but I often place a logical stop below a specific support level (for long trades.)

When I do not know, I keep both stop cells empty and the BC will place the stop just outside of the envelope, with a minimum of 2.5%



Pascal





Many thanks to Mike for the classical pattern analysis. Actually the BC Tool also confirms that the probability of success of a short trade is higher (thereby - the chances of failure of the long trade is higher).

While Pascal sought a response to the following question: "if I had no position in this stock, would I buy it here?", I sought the answer to the question " If I had a long position in the stock, should I sell it now". So in the BC tool I used the data till 01/27 (identical inputs for Pascal's analysis). I used a hard entry price as 0% of 5D MA - which is close to the closing price of 40.36. I used arbitrarily a stop of 41.00 ( Pascal- what is your thought on this?), and these are the results i got:

Input data

Entry Level from the short term MA 0.00%
Days for probability evaluation 100
Stop Level 41.00 1.65%
Target Profit/Loss Ratio 6.50 10.73%
Short Term Average 5
Expected holding days 5
Trade Direction Short
Long Term Average 50
Trade Type Bounce


Results for AER, Short Trade - Bounce to Resistance

Probability to hit entry price 98.00%
Next entry price 40.33
20D ATR 2.23%
Probability to hit Stop before Target 29%
Occurrences for stop 2 of 7
Position Size 100%
Probability to reach Target before Stop 14%
Risk/Return Ratio 4.43
Target exit price for max R/R Ratio 36.01
Expected profit per trade 1.96%
Envelope 3.60%


Strategy Analysis for AER

Calculated strategy profit for past 100 days 13.73%
Calculated B/H Trend profit 13.39%
Ratio of invested days 26.00%
Ratio of B/H Profit Captured 102.53%
Strategy efficiency 3.94


So clearly the chances of success of a short trade is much higher, and I should have sold my position at today's open.

Thanks

[Pascal]

Even though I closed the trade on the initial pull-back after day 5, the stock continued higher later on.
However, we can say that the settings were a failure.


Pascal

28335

[77seas]

Even though I closed the trade on the initial pull-back after day 5, the stock continued higher later on.
However, we can say that the settings were a failure.


Pascal

28335

Pascal

Last week's gains of AER which has a beta of 1.81 is 5.4 pct compared to SPX's gain of about 3 pct in the same period. I think that the reason that the analysis with data till 1/27 both from the short side and the long side did not support a long position has to do with the nature of the trend of the stock -AER. In the 100 days of the lookback period, I don't think one can characterize this stock as a strongly trending stock. That is why the data did not support the case for a long position. BTW - AER's stable mate AL did even better during this period though it has a lower beta of 1.56.

Thanks