Below is a snapshot of the chart that I looked at when deciding to invest in this stock. Verbal permission was obtained from MachTrader prior to showing any charts.
The red and green bars are known as candlesticks. Green bars tell me that the stock closed above its opening price for a particular day and red bars tell me the stock closed below its opening price for a given day.
Figure 1: DMND stock chart
The stochastic chart was showing me that the stock was oversold, and the blue line had crossed over the red line indicating that the stock was getting ready to move up in price. This was the only stock that I could find where the stochastic was showing me that the stock was oversold. Every other stock I looked at was overbought, indicating the price was going to go down. I coupled this information with the MACD chart, where it looked like the blue line had just crossed over the red line, also indicating the stock price was going to increase.
Points of concerns
- The strike price is really close to the actual price of the stock. One bad day in the market could cause the stock price to tumble way below the strike price, requiring me to purchase the stock. If the price goes below $38.85, and I am required to purchase it, then my premium of $115 would be eaten away.
- The earnings report is expected next week, and I am concerned the news may not be favorable.
Below is what the stock charts looked like at the end of today.
Figure 2: DMND stock chart on 10/01/2010
The 30-day Moving Average has moved lower since I first made my investment choice, which makes me worried that the stock is going to continue down in price. However, the Stochastic and MACD charts have trended upward as I predicted.
I am pushing my comfort level on this trade. Hopefully I can find a stock with a little bigger cushion for error next month.
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