Tuesday, December 4, 2012

GMCR - Anatomy of a perfect trade

I hope some of you got a chance to take GMCR trade. Think this was one of the easiest trade yet not completely perfect because the entry could've been a little earlier and we could've gotten more out of the squeeze. I was expecting this to be a $40 stock soon, yet didn't wait long enough to hit the mark. Nevertheless, it turned out to be good ~3% gain in less than 1hr.

So, here's why I took the trade
1) Stock gapped up big on the earnings and never looked back on 28th Nov. Had a huge volume that day.

2) GMCR has ~ 42% short interest (that is HUGE!!), which means people basically betting that this would keep going down. Also note that short interest has been increasing in recent weeks. Total of 51M shares short on a float of about 120M.

3) Turns out that blowout earnings were a major surprise for them. If you were in there position and had lost 30% in last 5 days and had a huge position what would you do? START TO COVER.

4) GMCR trades around 6.5M shares a day. If you have to COVER 51M shares, it would easily take 6-10 trading days, causing a BIG SQUEEZE!!!

5)  Onto the mechanics - See 30min chart below. High on 28th Nov was $37.48.  Then it had a little fade for next couple days.  On 3rd Dec it gapped higher with the market and faded back again. Notice the close yesterday - 37.46. This was perfect resistance and entry point this morning. However I waited until the market looked a little better. My entry point would've been break of Monday's highs at 38.65, but I entered at 38.40 in anticipation of the breakout. Turned out the market acted up well at that moment and we hada PERFECT SQUEEZE.

Continue to watch this one closely. We have resistance at $41 so we may pause a  little. Dips may be an opportunity to buy. I think this is headed for $48 soon, if not higher.

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