Swing Trade Case Study – China Precision Steel (CPSL)

As you know, all of the top Chinese stocks have been on fire.  You can start with Baidu.com (BIDU) (which I featured as Stock of the Day after breaking out a few weeks ago) and go on down the list.  At this point, I’d say the space is getting a bit too frothy with the smaller, more speculative names soaring to massive gains in short periods.  Case in point – China Precision Steel (CPSL), a very small China steel play in a company with highly erratic growth.  It’s a stock that has been in my list of #1 Longs (a new biweekly watchlist highlighting the best trading opportunities that I send to Gold and Platinum members) and was mentioned in the Telechart Live Chat room on Friday as I initiated a position at 4.64.  Below is the daily chart which illustrates the tremendous move over the past 3 days with extraordinary volume.

I was alerted to the move in CPSL on Thursday as it surged above the 50 day moving average but chose to hold off on a purchase until it confirmed the move.  With a gap up on Friday clearing the August highs at 4.29, followed by  tight consolidation and renewed heavy buying in the stock, it was all I needed for an entry signal.  There was certainly enough strength to test the August highs at 4.86 and potentially test the next level of resistance at the top of the gap down way back in April around 5.68 (which also happened to be resistance around the 200 day moving average).  This morning, when the stock gapped up above that key resistance level too, I knew it was on. 

… BUT I made a big mistake!  Instead of sticking to my trading rules, I went with my intuition on this one and decided to lock in profits on half of my position at 6.16 right at the open.  I was the opposite of greedy – I wouldn’t call it fear, but I would call it being too cautious.  The rule that I typically use when deciding to lock in a gain on a gap up is whether the stock closes in the upper half of its range on the 10 minute intraday bar (as shown below). 

This morning, I didn’t let the trade develop at all and it cost me a big chunk of change.  I can’t be too discouraged because the total position was closed for a nearly 50% profit, but I think there are lessons to be learned in even successful  trades as I’ve shown here.  I closed out the last half of my position when it broke through the 50 day moving average on the 5 minute chart.  However, given the amount of volume behind the move today and the fact that it closed near the highs of the day once again, there is a very good chance it could run again at the open tomorrow.  If you’re holding a position overnight, consider not making the same mistake I made at the open today and let the stock complete that first 10 minute bar.  If it closes in the lower half of the bar, you might want to take the profits in this highly speculative stock.

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