I sold the CMED calls Monday.. here's why...

Important pieces added here. This post says "here's why" but on Tues night I did not have time to go into more detail. The why is what matters, and how you may help succeed! Added to the end of the post I go into the why...
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Those who have followed this blog for a while know that I bought the Jan 10 CMED calls when CMED was at 32. On Monday I sold... and had I still held common stock (I sold that in the 40s) I would have sold common as well on Monday. I certainly could not have anticipated a better than 10% drop in one day on Tues but there was evidence that the stocks that had run in this sector might be cooling a bit... and that CMED might be especially ready to sell off in the short-term. This was spoken in the charts... a clear accumulation/distribution pattern after a long run-up and a cooling sector chart at the same time... also I have said that when you have gains in this market you have to take them. At the 'Rose' we try to practice what we Preach.

I am not saying this to be boastful... the second you become boastful in the market is the moment that you will be humbled... so why not just be humble to begin with? Let's face it... I also got lucky... however I liked the probability taking the gains there. I also sold some of the shorts on POT(the hedge) AH, that I previously bought at the 200 (167)... as I later saw a pattern develop and a close above the 200 that looks like some buying interest may be coming in. The overall chart still looks awful though so I still have significant hedges... we'll see what happens tomorrow. MOS did not have the same pattern development by the way... Here is the chart of CMED for today... yikes... but it has fallen so far and is near support... may be worth a look... RSI 50 too.

Chart added on Wednesday Morn... the rest of the post was written on Tues niht,

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Now for the added section and the 'why'. This is a trading market, especially on the long side. That means that anything held should we watched closely for sell points. This doesn't mean act necessarily... it just means be watchful. Successful trading really consists of putting probability as much in your favor as possible. There were several factors converging here at once that made me feel like taking gains was prudent.

• It really started with my look at the sectors. As I mentioned on the previous post RXL, the health care ETF, was starting to flatten out after a fairly substantial uptrend and the chart was, still is, a potential short. I noticed that the charts of companies such as IVGN, MYGN, and others... ones that sell similar products to CMED, were flattening out after large runs.
  Money flow seemed to leaving, or at least reducing into, these types of stocks.
• The CMED chart had many red flags on it. The RSI was hitting 70 after a large run-up. It hadn't turned yet (see it PAYS to Be Trendy... see top posts... for a discussion on proper use of RSI) but this was the second bounce off of it.
  
• Just as striking, it is clear that there had been a large, late, inflow into CMED. This was marked by the exhaustion gap that was in the process of being formed... which often precedes the type of island reversal we saw here. Both, after large run ups, are considered among the most reliable reversal signals. Additionally, this was confirmed by the divergence pattern in the MACD. Notice how the black line on the MACD just took off from its moving average (the red line) at the end of the run. It again suggested that lots of money that had been on the sidelines... the last buyers... had finally jumped in. When everybody is on one side often the only way it can go is to the other
• This is a bear market. Bears an their computers are just waiting for solid trading opps. The chances are, when they see a chart like this, a lot of inflow will enter the stock... shorting... While stocks may seem to go down almost indefinitely in a bear market you can be sure that most stocks that have gone up will be sold at key shorting formations. Theoretically in a market like this most people should have a short bias- that means they should look for shorts at least as often as longs... though that depends on the intermediate trend, among other things. Also, it depends on how comfortable you are with this. However, at the very least you should always be looking for exit strategies on longs and/or use stops to protect gains.
• The pattern that really sold me, when combined with the other factors, was the flat pattern in the stock that I saw when I took a look towards the end of the day on Monday. Take a look at the chart on Monday. You know I recommend Technical Analysis of Financial Markets by John Murphy... in the book he writes that such flat patterns are often periods of accumulation (buying) or distribution (selling) by big names. The logic is clear... the big names want to enter or exit their large positions in pieces so that they don't move the stock too much. Once they have achieved their goals they have soaked up a lot of the selling or buying interest... creating in imbalance in the market. It is also true that computers and chartists probably look for this kind of thing and jump in as well. I had no idea here if the pattern meant a move up or down was likely based on this pattern alone... but given the recent stock moves and the factors mentioned above I didn't want to take any chances. Time to hit the exits. Also, this is about not being greedy. The gains were quite nice... did I need an extra little bit... or would I be ok if the stock continued to move and I missed getting more? If you ever have to ask yourself this question you already know the answer.
• I was not yet confident enough in these techniques to go short... just selling the options was good enough for me here... that may change as I continue to learn and question things...
• Finally, I believe in the rule: Fool you once.. shame on you.. Fool you twice... you can't be fooled again... In the Spring there was also a huge run up in CMED... and as I knew this was a great company I sold some but also held on to quite a bit... and then the stock was just decimated... the same pattern emerged... a 'bump and run' pattern where the slope of the stock just shot up after an already large run. In that case the stock sold off like crazy... largely because the company was misunderstood as a HIFU play only rather than a diagnostic company... and HIFU sales were slowing... nonetheless it probably would have been sold off anyway, though not as extensively, even if this had not been so grossly misunderstood because too much hot money had come in at the end. Leveraged too.
  
• Overall... when you put all these thing together what you get is a probability game. The probability of a sell-off here was large enough, certainly, to strongly consider selling. In order to know the probabilities you have to pay attention to your holdings, your charts, your fundamentals... etc... if there is a positive to this market it is that you are always compelled to learn more and achieve higher. Complacency is simply not an option.
  

Here is the chart from before... the not so fun training guide, if you will. Notice some of the similarities including the RSI, large run, diverging MACD, movement against the upper Bollinger Band, more...

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