May Commentary

Getting back to our good habits, let's follow-up on Worldgate Communications (WGAT). In the February commentary, we analysed this security and our expectations were quite bullish with a plan to opt out should things go wrong. Well things did go wrong for a while and the exit rules should have been obeyed. The plan had to be changed to preserve capital and at the same time position ourselves for a sudden burst. The bullish expectation was not only based on Elliott waves but on the knowledge that the product had proven good in the tests. From an Elliott standpoint, the aborted wave 5 (Where the short arrow points) and then the shallow wave 3 (the new pattern, long arrow) were a familiar pattern. This pattern occurs during periods of consolidation where a bullish wave will be killed by a bearish wave, only to resume the initial bullish trend. This is what I expected and I looked for signs of the revival of the bullish pattern. The first one was the weakness of the wave 3 and the second one was the trading range from end of March to April. A third one came in the last days of April, the crossing of the trend line three times in a row.

Click on the image to enlarge.

I use "I" because it was shared only with some classes I give. I did not get out of the position like I should have (I still believe I should have exited); instead, I bought more at 1.30 and waited. My plan, because I had a new one, was to sell half on the estimated peak of the fourth wave that I placed at 1.83 and then ride the wave until it would turn. The whole month of April went by and although there were a few test around 1.70, I held on to my target of 1.83. I suspected more and more that it would be an impulse wave rather than a correction (wave 4). In the final days of April, I was convinced that I was right, but the move could be very fast and then the security would resume a slower course because it cannot go against the trend for a long time. I exited the position on May 3rd.

This is not about boasting but about observation and confidence in a system. Even while I tell the story, it is full of trading errors from a discipline standpoint, from a capital preservation one and from a common sense one. Here is the way this trade should have been handled:

1- The trade should have been exited at 1.55 with a .10 cents loss. 2- An entry at 1.35 would have provided a safe trade with an expected exit at 2.40. 3- Sell first half at 2.40 or market (because of the gap). 4- Ride the wave with an ATR stop loss. The lesson from this experience is stick to your trading plan, don't second guess the market (it took nearly two months to react) and always preserve your capital.