Today I'm talking to Ron Feinstein, editor of EWI's Prime Stocks Flash service, as he dissects the anatomy of a "Flash alert" he issued for Molycorp (MCP) back in October.
Bart: In September, less than a month before you issued that "Flash alert" for Molycorp (MCP), the stock was trading around the $56 mark. On the day you issued your alert (Oct. 5, 2011), MCP had fallen to around $30. What signaled to you that the selloff was nearing an end, and it was time to turn bullish?
Ron: In a nutshell, 3 things:
1. While it's not evident in the price chart below, I spotted an Elliott wave pattern that was completed to the downside: an ending diagonal triangle. The diagonal is a terminating pattern that only occurs in waves 5 of impulses or C-waves of corrections. In other words, diagonals precede a dramatic change in trend. Because this particular diagonal was to the downside, its completion signaled to me that the next likely move would be up.
2. Decreasing downside volume, indicating that sellers were running out of steam.
3. And finally, momentum divergence: a sign that a stall or reversal was likely.
Bart: Soon after your "Flash alert" posted, Molycorp rallied in a classic 5-wave Elliott wave pattern. You watched this move carefully and updated subscribers with suggested stop adjustments. Once price action confirms your wave count, how do you adjust your stops?
Ron: Placing the initial stop and adjusting it as the market moves in your direction are critical to risk management. I continuously reassess the "Flash alert's" potential risk/reward ratios as I adjust my Elliott wave counts. In my Prime Stocks Flash, I strive to take sizeable chunks out of a price move, but not the ‘whole’.
Bart: The Molycorp "Flash alert" was stopped out at the $37 level on October 12. Were there any signs that pointed to the rally's end?
Ron: There were many, but the price action was really the key. While MCP did progress higher into November, price action was dubious with lots of choppy, overlapping trade. We decided not to "chase it" and it ultimately collapsed below $25.
Bart: Obviously, not all of your "Flash alerts" follow the script as this one did, but you've mentioned to me before that each of your "Flash alerts" must meet strict criteria before you'll issue one. What key criteria do you use to help minimize theoretical risk?
Ron: After making my technical assessment of the price action, I consider the most likely wave patterns that might develop. The criteria are varied, but initial theoretical risk/reward is crucial. If a "Flash alert" gets any traction, the movement will ideally let us know what scenarios are still viable and which ones are not.
Bart: Ron, thank you for your time.
Ron: My pleasure.
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