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Bulkowski’s Blog Archive: ZEP

Blog Posting: March 13, 2008, The Zep Trade (Zep)

I have been trying to focus on long term holdings and followed the advice of Peter Lynch, that of buying spin-offs because they are well capitalized, often well managed with eager people wanting to perform. So, I bought Zep. Here is a portion of my notebook entry for the trade.

 

Today's date: 02/01/2008

Order details: bought using a limit order, computed using the average of prior candle (1/31/08) high/low: (16.55+15.75)/2=16.15. I expected a 50% retrace.

Date bought: 2/1/2008

Stop: 14.46 -16.9%. Stop used: 14.13, below the minor low

Upside target: ?

SAR: none

Next earnings: early April

Weekly scale (industry, too): N/A

Indicators: RSI: oversold. CCI: buy 2 days ago.

Buy reason: Peter Lynch play: buy spin-offs. With the economy I believe will recover, this may do well since it provides janitorial supplies and such. I think those things are needed regardless of the economy.

3/6/08 Stop raised to volatility stop setting: 15.47

3/12/08 This has double topped, in my opinion, and it's poised to drop. Yesterday the dow was up 416 and this stock barely budged. Time to sell.

The entry was unusual, using a Fibonacci retrace of the prior candle height to determine the buy price. I was filled at 16.15. Then the stock dropped but it did not bother me because it was a long term holding (supposedly). Price actually dropped to the 14.46 volatility stop setting recommended by my program, but my stop was below that, so it wasn’t hit. Then price moved up forming a rounding turn and then a double top. When price began receding from the second high, I knew the play was over. Sell justification was the same as my Hecla Mining trade, that of price reaching an old high and tumbling. Although there is a 65% chance that price will not make it down to the confirmation price (the lowest valley between the two lows, and 65% is based on research), in this market environment, I did not want to take the chance.

As the inset shows, price formed a doji yesterday at point A even though the Dow was up 416 points. Yes, price did close higher but I felt it should have done much better (a 2% rise versus a gain of 3.5% for the dow). My guess is that the markets might rebound due to the FED manipulating interest rates but then it will resume the downtrend. I did not want to be in the stock if it is going down. So, I day traded the exit and received a fill of 16.34, or about 1% above my buy price. The stock closed down $0.30 or -1.8% today (3/12).

Expanding on the notebook entry, I use a volatility stop so that I do not place it too close to be stopped out on normal price action. In this case, since it was supposed to be a long-term holding, I moved the stop below the prior minor low (the low on January 23). If price had declined and touched my stop, not only would I have been pissed, but I would have had a tidy loss (12.5%). The 16.9% volatility stop measured from the high of 17.41 on 2/1 and not the buy price.

As a long term holding, I did not have a target price. Those are hard to set when it is trading at a new high and this is a spin-off anyway (just a few months old).

SAR means Support and Resistance. Since price was making a new high, there is no overhead resistance to worry about.

RSI is the Wells Wilder relative strength index. CCI is commodity channel index. I also follow Bollinger bands, but it did not appear due to lack of price data.

Aftermath

Since selling the stock, price flat-lined like a dead animal for a month before trending lower. Road kill anyone?

In the figure, the bought and sold arrows do not point to the prices at which the transactions occurred, rather to the days when they occurred.