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Looking for an Island Reversal or to Fill the Gap

May 3, 2010 Business, Equity Trading No Comments

Today, I started a position in Transocean ($RIG), the operators of the oil rig that recently blew up in the Gulf Coast and currently pissing off environmentalists. I’ve been stalking its movement ever since the sell off last week. It’s my belief that sellers over-reacted, and that the company’s stocks now represent a good value.

….well, at least good enough for a trade..

Around 11:30am (Eastern time), the stock started to move up. I watched it for a good while to confirm upward price action. Eventually, I started a position at around 12:20pm (Eastern time) – blue arrow.

On this 15-minute chart, which shows the price activity for the past week, you can see a bullish hammer right before the point I bought the stock; that was another good sign that the stock was moving in the right direction.

This particular trade is going to be a swing play, where I’m looking to hold onto this stock for at least a few days or so. Ultimately, I’m looking for an island reversal (where price will jump back to the level prior to the sell-off)  or to slowly fill the gap (where the price covers the empty space). In any case, my plan is to start selling at the point of the red arrow. I may look to increase my position size if the stock hovers above the horizontal, solid white line for a bit.


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