Trade Review: M and LCI

I made a couple of foolish trades this week which I want to document and distill some lessons from it.

M made a nice breakout with huge volume from the base that it has formed from May to Aug upon earnings report.  It shooted above the 200 sma as well as the resistance at $37 then.  Subsequently it pulled back on light volume for the ensuing 2 weeks.  I tried to play it as a breakout pullback set up.  I believed that $37 should provide strong support and could act as the stop loss level.  The recent high of $41 could be a swing target.  On 30 Aug it has pulled back very close to 200 sma and stochastics was already oversold.  I decided to place a limit order right above the 200 sma (38.01) the next day.  This should give me 3 to 1 reward to risk.  Very nice indeed.  My order was filled shortly after the market opened on 31 Aug.  Soon after I received the order filled message from IB, I viewed the quotation and found it was trading around $37.5.  I had a feeling that this might be a falling knife.  But when I thought about the reward to risk, this was really a good deal.  So I entered the other half position at $37.5 (total 700 shares with avg price $37.8).  But then it continued to tank, all the way down to around $36.1.  Towards the end of the day, it printed a big red candle on heavy volume.  I bailed out my position at $36.16.  I lost $1148 catching this falling knife.

Lessons learned:

- Before a *support* is tested, it is only hypothetical.

- Never catch a falling knife.

- Market tends to surprise you towards close, be patient.

LCI is another breakout pullback candidate that I traded unsuccessfully this past week.  The pattern structure of LCI is similar to M.  It has also formed a giant island formation and was pulling back on light volume post earnings breakout.  I believed the support was around $33.  And the several candles that it printed prior to my entry did show some suport at $33.  On 31 Aug (yes, the same day as the M trade), it broke below $33 but then rose again towards market close.  Having absorbed the lesson from the M trade, I decided to wait until market close before entering.  I bought 400 shares at $33.91 at market close when it has printed a beautiful long tail hammer over an important support ($33).  Taking note of M's experience, I decided to use a looser stop to allow for more surprise from the market.  I believed I have done a good job this time.  Oops!  It tanked 2 days and stopped me out at $31.77.  I lost another $856 in this trade.

Lessons learned:

- A valid test of a hypothetical support is good, it's even better to wait for a confirmation of the validity of the test.  For example, another day's close above the high of the test day.

Overall reflection:

I seemed to be believing in something that the Market disapproved (the support levels) in the end.  Perhaps I should be more humble and patient to wait for Mr Market to reveal how he thinks.  Listen to the Market!