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Paying ourselves with Aquila

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In this morning's market monitor, I suggested that bearish traders in past profiled bearish trade in Aquila (NYSE:ILA) $10.72 -12.48% take some profits off the table as the stock got hit hard on a Banc of America Securities downgrade and an announcement by Aquila (ILA) that it has received an informal data request from the SEC and that it is considering a modification of its dividend policy.

Aquila Inc. Chart - Daily Interval

In recent weeks, my e-mail was "overflowing" from subscribers short/put shares of Aquila (ILA). For those that hung in there, showed patience, and stuck with the technicals, today they get their reward and should be locking in some gains.

Shares of ILA gapped below my previous retracement bracket levels and risk/reward became difficult to asses. As such, I needed to do some work with retracement. The first question I ask is "why did the stock find opening support near $9.80. I think the above "fitting" technique perhaps answers that question. Based on this retracement, I'm suggesting that bears lock in at least 1/2 position as gains from original profile should not be risked (at least not all of them).

I would also suggest in the future, and at some "oversold" market condition, that a trader who does find himself/herself fortunate enough to be short/put a stock that declines some 10% or more in a short amount of time that they look to lock in some gains and pay themselves for the risk they took.

With Aquila (ILA), we have to work from a point and figure chart where the stock had already exceeded its bearish vertical count and longer-term risk/reward was difficult to assess. This remains the case and we were unfortunately left with just the bar chart (one tool instead of two) and retracement to assess further risk/reward.

For those closing out full positions, I would keep the stock on the "watch list" for potential re-entry back near the $13.00 level, where a tight stop could then be place back above the $13.25 level, and then be targeting the $9.60 and $5.94 levels once again.

Many traders are e-mailing me with questions regarding support/resistance levels on stocks that are breaking to new lows. I can't get to them all, but hopefully you can use the retracement brackets and the point/figure chart vertical counts (when they haven't been exceeded) to be looking for some levels.

Jeff Bailey
Senior Market Technician
Option Investor

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