On Tuesday I completely sold out of my position in Ezchip (EZCH) which was representing around 30% of my portfolio for a roughly 23% profit. The trade was about 1.5 months in length start to finish and yielded some good reminders for trading momentum.
What drew me to EZCH originally was the two month+ base it formed from September to its breakout in early December. The stock was already on a run as it broke out of a four month base in July (1), a one month base in September (2), and was setting up another nice multi-month base (3).
*The following is referencing the next chart below* Focusing in on the 3rd base (1), the formation was very straightforward. Three times the stock found support near $22.60 and the primary resistance was between $26 and $26.60. As the stock leveled out volume dried up towards the end of November setting it up for its breakout.
I personally bought using a split purchase, 50% of my position at $26.20 and 50% at $26.70 (2), and immediately put a stop for the full position at $25.50. The reason for two purchases is simply lowering risk. I can’t begin to tell you how many times Ive seen stocks break one set of resistance just to turn back down. Thus I always wait for actual highs to take a full position.
Thinking there was perhaps a bull flag setting up and the stock was ready to take off again, I added 50% to my position as the stock clear above $29 for the third time (right of point 3). When taking follow up positions I do not give any room with my stop loss, its either a hit or miss. In this case it was a miss as the stock reversed back down under $29 and knocked me right out of the added position to break even. This leads into a critical occurrence.
The stop for my original position by this point had been raised to $26.20, or break even with the original buy and about 2% from my 2nd buypoint of $26.70. With a stop here I ensure nearly no losses and I can simply give the stock room to do its thing. This ended up bring critical as the stock bottomed at $26.62 (4), finding support as it should have right at its previous breakout level.
From here the market was doing fine and EZCH setup to breakout again (5) through $29 resistance. While this technically was a 5 week base breakout I opted to not add to my original position again. What should be noted though is the drop off in volume just before the stock broke out and the huge jump as it made its way through $30. All very bullish.
As the stock (and market) kept moving up, I was preparing to sell. Not because I felt a reversal was in store, but I simply needed to raise cash for some personal matters. As dumb luck would have it, I sold out half my position at about $33 and the other half at the end of the day around $32.30 (6). This locked in a net profit of just over 23% for the whole play.
All in all there are some great reminders here. Find high quality stocks, wait for good bases, don’t rush the original position, correct stops not only allow space to move but also minimize risk, support should always come at the previous resistance point, adding to positions is never bad if you manage it properly, its never dumb to take profits, and lastly it is never bad to get some dumb luck.
Stay frosty out there .
More stock chart examples and lessons below.
- Example 21: How Akami’s (AKAM) Stock Chart Foretold its Earnings Miss
- Example 20: Ezchip (EZCH) <–- Currently Viewing
- Example 19: 6 Reasons Why Deckers Shoes Recent Breakout is Huge
- Example 18: A Closer Look at Chipotle’s (CMG) 150%+ Run this Year
- Example 17: Dryships Stock Offers 5 Valuable Lessons For All Investors
- Example 16: The Rise and Fall of Crocs Footwear