Happy Halloween everyone,
How to avoid getting wiped out & how to properly trade and read the chart on a stock like MF Global
Doesn’t look like MF Global gave any treats today to shareholders except for the ones that were short on it
Whenever you get a stock like MF Global that went bankrupt today , I like to review to see what can be learned from the chart
Many that have been long on this MF stock today wish the ticker had been renamed MotherF..er since they did file for bankruptcy.
Here are important rule I wanted to share to help you stay away from a future MF ( although it has happened even to me in the past) but these simple rules can avoid some costly mistakes.
Although the stock had been weak thru 2008 it had a nice V-Shape formation & nice runup from under $2 ($1.72) to almost $10 ( $9.94). Next major drop it had was into July/Aug 2011 when it started to fall back & finally broke under the key $5 level and never recovered from there.
Here are some notes to help if you ever get stuck in a stock like this:
1) Be aware of key levels of support ie $5 was a major breakdown in July/Aug – I’ve traded many stocks over the years of stocks breaking thru $1 , $5 $10 $100 ( to me these are major levels & often work very well for both long & short positions)
In MF case $10 was never broken back over thru 2010 or 2011 ( if it broke over $10 could have some momentum) . Once $5 breaks down ( i like to go slightly below like $4.75) use that as a suggested stop out area & you can always trade the stock again once it breaks back over $5 or $10 ) . If a stock breaks under $10 ( use $9.75 as suggested stop & re-enter once the stock bases or once it gets back over $10 ) This can help you stay out of stocks that continue to downtrend without recovery.
2) You can trade these stocks thru consolidation areas ( as long as those areas don’t fail ) in MF case you could have traded it initially in 2007 when it was consolidating in the $22 -$31 area — once that area breaks stop out & wait for next set up. Next consolidation area was thru 2010/2011 ( low $5’s t0 $9+ area )
3) Nice V shape formation trade into 2008/2009 formed once it found a bottom ( which matched pretty closely to the bottom of the markets during that same period ) — in MF case it was a bit sooner than markets since bottomed in late 2008 but can see it perfectly on the chart
4) Scaling into key levels & Scaling out is something that will limit your position exposure
5) Never , Ever , Ever put all your money into one trade. That’s just asking for future failure even if it works for you many times over. Position sizing is critical. You can always reduce or increase an individual stock size but keeping them similar reduces your chances of blowing up an account.
6) There are opportunities to trade bankrupt stocks once they come out of bankruptcy. We saw that recently with $GM but initially these are dangerous trading stocks so unless you have a lot of experience don’t trade them. Also read Rule # 5 again if you decide to trade that volatility. There is also a short covering rally that occurs on many of these since those positions still have to be covered ( unless your clearing firm is MF Global then you may have a bit more trouble today)
Good luck & check the chart i did below – To read more about the details of what happened to MF Global & why it went bankrupt read the articles below . Hope these notes are helpful
Some articles on MF Global today :
Wall St. Journal : MF Global: Good Bets, Bad Timing? http://sg22.ly/rwrKYA
MarketWatch MF Global files for bankruptcy protection http://sg22.ly/tQs2Wi
CNBC : MF Global Files for Bankruptcy; Shares Remain Halted http://sg22.ly/tFRk6u
Bloomberg:MF Global Floor Traders Limited to Liquidations by CME, Intercontinental http://sg22.ly/rPq8z4
Double click the chart to see it much bigger & to read all the notes i posted. Chart of MF Global is a weekly one since I wanted to show the entire trading for it .
Happy Halloween ,