Monday, July 27, 2009

AK Steel Holding Corp

Company Profile
After a great run through early June, many of the steel stocks topped out and needed a rest. AKS made us some great money on that run higher, and thus when it was correcting back it went on a watch list so we could play it again when the money returned. From that June peak to early July it set up what is called an ABCD pattern, this one a bullish version. Just when it looked as if AKS was heading lower it held at prior support from a prior peak and the 50 day EMA, and made the D point.

We put it on the report at that point and the next day AKS gapped higher on rising volume. That was our buy point and we moved in with some stock positions at $17.24 and some September $15 strike call options at $3.60. When a stock sets up this kind of pattern when you see the move higher you move in because if you don't you often miss out on the advance.

Sure enough AKS gapped higher for a second session, adding 8.4%. Nice. On 7-16 AKS added more upside, rallying another 5.9%. The next session AKS was at it again, but after moving over the C point in the pattern it stalled and closed flat on the best gain of the move. We were a little bit concerned about that reversal on volume, but the stock was working well, and you need to let these patterns work. On Monday 7-20 AKS gapped higher and kissed the A point in the pattern. That is your initial target in an ABCD pattern and we are programmed to take part of our gain off the table when it hits that level. Thus we sold half of our stock position for $20.95, banking 21.5% on our stock positions. We sold half our option position for $6.30, netting $2.70 or 75%. Not bad for 5 sessions in the play.

AKS tested back after that move, falling 4.7% the next session and another 4% the next. It held, however, at near support at the 18 day EMA, and started to bounce Thursday. Do we forget about AKS at this point? No way. After the move to the A point, if the stock tests near support, holds, and then starts back up, we buy into more upside positions for the breakout over the A point. That gives us a good risk/reward entry point because if it breaks the A point it can start returning us 3:1 or 4:1 on our option positions, i.e. the big money. If it doesn't pan out then we stop out without losing much. That is how you really make money in the market, i.e. picking good entry points that give you plenty of upside while giving you a good stop loss point so you can have a play work for you without it cutting you out of the play with a stop just before it makes a big move.

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