Jan 20, 2010: PFE Trading Opportunity

Today, I was planning on blogging about the US bank earnings that have come out the last few days, but I've decided to hold off, and bring to your attention a potentially profitable trade. Last night, Republican Brown won the Massachusetts Senate seat, which is expected to "de-rail" Obama's health-care bill. Just five days before the election, drug stocks rose substantially: Pfizer [PFE:NYSE] and Merck [MRK:NYSE] have risen up nearly 8 per cent. Both stocks are now above the Bollinger Bands, and have been there for at least three days. The last time I made a Bollinger Bands prediction was on MGM, and if you shorted the stock the day after I mentioned it, you could have made at least 20 cents a share if you held on today. Pfizer was trying to push itself through the $20 level, a great round number for traders. The stock would push through the price today but finished at $19.94. Along with the overbought signal represented in the Bollingers, this could signal a sell-off tomorrow and the next few days, as buyers are not willing to buy above $20, and sellers think $20 is already too high. To better explain the logic behind a resistance level, think of it like a basement ceiling. Not to get sadistic, but imagine you have people trapped in a basement and trying to break the ceiling to escape. The more people you have supporting the move, the higher the probability the ceiling will be broken, and then people can flee above. However, if there are not enough people to aide, the ceiling will remain there, and people may eventually give up. In the case of Pfizer, the stock broke the $20 "ceiling" but was pushed back below $20, as if the guards forced them back into the basement. For traders, people will usually wait three trading days to see how the stock reacts, but I am not patient enough to wait. You must trade with conviction and confident to make the money before the horde follows suit. So, my logic here is quite simple. The stock had trouble staying above $20, and it is above the Bollinger Bands, so I would suggest playing the downside: short stock, short call, or buy puts. The previous resistance was $19 so let the stock fall near that level before closing. For those that can not see the resistance of $19, look at the chart. You can see the stock made five attempts to go above that level. When it finally did on about Jan 12, the stock rose. In a future blog, I will teach my readers how high or low a stock will go.