NATURALEZA, FUENTE DE INSPIRACION CREATIVA

As has been illustrated in these examples, the key to continuing profits from our short-term ripple trading tactics is to repeatedly buy and sell the same stock, using the buy price of the previous completed roundtrip trade to indicate the next buy signal marker. Given the nature of the short-term price ripples, that marker will typically be reset continuously as the stock fluctuates more to the upside or downside on a ripple move. However, from time to time we have found that a pattern can develop in a stock that es-sentially pegs a specific price as our fixed entry point that we can use over and over again. The two best examples of this price pegging in our recent record are found in our trading of Central Fund of Canada in 2005 and Genentech in 2006.

Central Fund of Canada

Central Fund of Canada (CEF) has essentially no business operations but acts as a repository for gold bullion and also some smaller volumes of silver (see Chapter 7). Therefore, it is a good stock to use as a proxy for trading the gold price without the cost and inconvenience of the trader actually holding or delivering the physical gold itself. Gold stayed within a fairly

98 CONTRARIAN RIPPLE TRADING

narrow range for the first 10 months of 2005 and only after that began to advance strongly from November 2005 onward. While the price of gold re-mained in this narrow trading range so did Central Fund of Canada stock.

We traded in and out of CEF from January 3, 2005, to September 15, 2005.

It quickly became apparent to us that a pegged price of $5.30 was an opti-mum entry point that enabled a regular in and out ripple trading pattern, always 1,000-share lots as follows:

Bought 1/3/05 at $5.39 Sold 2/14/05 at $5.46 Profit= $50 Bought 3/28/05 at $5.31 Sold 3/30/05 at $5.36 Profit= $40 Bought 4/14/05 at $5.30 Sold 4/19/05 at $5.36 Profit= $50 Bought 4/28/05 at $5.30 Sold 4/29/05 at $5.38 Profit= $56 Bought 5/2/05 at $5.30 Sold 5/3/05 at $5.36 Profit= $50 Bought 5/6/05 at $5.30 Sold 5/9/05 at $5.35 Profit= $40 Bought 5/9/05 at $5.30 Sold 5/10/05 at $5.35 Profit= $40 Bought 5/11/05 at $5.30 Sold 6/2/05 at $5.40 Profit= $90 Bought 6/10/05 at $5.30 Sold 6/10/05 at $5.35 Profit= $40 Bought 6/10/05 at $5.30 Sold 6/10/05 at $5.36 Profit= $46 Bought 6/14/05 at $5.30 Sold 6/16/05 at $5.38 Profit= $70 Bought 6/28/05 at $5.32 Sold 8/4/05 at $5.38 Profit= $42 Bought 7/15/05 at $5.22 Sold 7/21/05 at $5.28 Profit= $46 Bought 8/9/05 at $5.29 Sold 8/11/05 at $5.34 Profit= $40 Bought 8/26/05 at $5.30 Sold 9/1/05 at $5.36 Profit= $50 Bought 9/13/05 at $5.30 Sold 9/15/05 at $5.37 Profit= $60 Bought 9/13/05 at $5.30 Sold 9/15/05 at $5.38 Profit= $66

We traded 17 times in and out of CEF in 2005, buying 12 times at pre-cisely the $5.30 pegged price point. We netted $876.

Genentech

South San Francisco, California-based biotech company Genentech (DNA) has successfully launched innovative treatments for medical conditions in the fields of biooncology, immunology, and tissue growth and repair.

Genentech is the leading provider of antitumor therapeutics in the United States. For several years, Swiss pharmaceutical giant Roche Holding has held a majority stake in Genentech. In 2005, we had no established pegged price for Genentech, and traded into the stock for the first time at $51.33 after Genentech had come back down from a high of $68 in April 2004. We bought DNA in 100-share lots each time as follows:

Bought 1/11/05 at $51.33 Sold 3/14/05 at $53.98 Profit= $245 Bought 2/10/05 at $45.62 Sold 2/14/05 at $46.68 Profit= $86 Bought 3/10/05 at $44.75 Sold 3/14/05 at $53.74 Profit= $879 Bought 3/17/05 at $52.94 Sold 3/21/05 at $57.89 Profit= $476

At this point, Genentech mounted a very strong rally on the basis of positive developments relating to its breast cancer therapy Herceptin, and increasing optimism regarding the potential of Avastin, a drug that treats colorectal cancer. By November 2005 Genentech briefly touched the $100 level. Then it dropped back over the next months as investors felt that the advance had been overdone, as well as on negative news regarding pa-tient fatalities following treatment with the non-Hodgkins lymphoma drug Rituxan marketed jointly by Genentech and Biogen Idec. We bought into Genentech again on April 24, 2006, and traded it a total of 21 times in 2006.

It soon became clear to us that the trading pattern of the stock indicated a great price peg buying opportunity at $80 and we targeted precisely that price as an entry point, buying DNA whenever we noted that the stock had dipped beneath that level. The use of this price peg of $80 in the case of Genentech is well demonstrated in our trading in the stock as detailed here:

Bought 4/24/06 at $79.89 Sold 5/5/06 at $80.71 Profit= $72 Bought 5/2/06 at $75.65 Sold 5/2/06 at $76.20 Profit= $45 Bought 5/9/06 at $79.88 Sold 5/15/06 at $80.69 Profit= $71 Bought 5/15/06 at $79.68 Sold 5/26/06 at $80.93 Profit= $115 Bought 6/6/06 at $79.86 Sold 6/30/06 at $81.75 Profit= $169 Bought 7/17/06 at $79.82 Sold 7/24/06 at $80.70 Profit= $78 Bought 7/24/06 at $79.80 Sold 7/24/06 at $80.33 Profit= $43 Bought 7/31/06 at $79.96 Sold 7/31/06 at $80.51 Profit= $45 Bought 8/1/06 at $79.94 Sold 8/1/06 at $80.46 Profit= $42 Bought 8/2/06 at $79.99 Sold 8/3/06 at $80.61 Profit= $52 Bought 8/7/06 at $79.93 Sold 8/8/06 at $80.72 Profit= $69 Bought 8/8/06 at $79.94 Sold 8/9/06 at $80.83 Profit= $79 Bought 8/10/06 at $79.97 Sold 8/17/06 at $81.85 Profit= $168 Bought 8/24/06 at $79.99 Sold 8/29/06 at $80.75 Profit= $66 Bought 9/11/06 at $78.31 Sold 9/11/05 at $78.84 Profit= $43 Bought 9/11/06 at $78.35 Sold 9/14/06 at $79.04 Profit= $59 Bought 9/14/06 at $78.62 Sold 9/15/06 at $79.45 Profit= $73 Bought 9/18/06 at $78.63 Sold 9/19/06 at $79.59 Profit= $86 Bought 9/19/06 at $79.04 Sold 9/26/06 at $79.76 Profit= $62 Bought 11/14/06 at $79.99 Sold 11/15/06 at $80.72 Profit= $63 Bought 11/27/06 at $79.96 Sold 11/28/06 at $80.58 Profit= $52

100 CONTRARIAN RIPPLE TRADING

It should be noted that even when we bought well below $80, such as the early September 2006 trades, we still sold once our target profit had been reached. Even in those cases where the price had not come back up to the $80 peg, the discipline of our method dictated taking the profit.

DNA broke out to the upside and moved away from the price peg after our November 27/November 28, 2006, trade, based largely on positive news regarding Lucentis, the company’s new treatment for “wet” age-related macular degeneration (AMD), which can cause blindness in the elderly.

We traded the stock just one more time in the period covered by this book on a dip.

Bought 12/14/06 at $81.49 Sold 1/4/07 at $82.23 Profit= $64

Buying and selling Genentech in this way earned us a trading profit of

$3,302 from 26 trades, including the four roundtrips from 2005 and the last trade of late 2006/early 2007 that were not based on the price peg.

By the way, readers who are chartists or technical analysts will imme-diately recognize that what we are calling a price peg is pretty much the same as what they would call a support level, a level at which buyers tend to come in and cause a rally to start or resume. Technical analysis and char-tism have some traits in common with our own approach to identifying buy signals because they plot historic price movements using charts in order to spot patterns that will allow them to predict future price moves. However, we feel this kind of analysis often seems to enforce a level of exactitude from what are essentially quite fluid patterns that to our mind is unrealis-tic. (Buy a good stock at $50 if it used to be at $65 because, after all, we would rather buy it when it is cheaper than when it is more expensive. This sums up our fairly simple approach.) Also the excessive use of jargon that is the stock in trade of technical analysis/chartism (e.g., head and shoul-ders, the hanging man, shaven head) turns us off and so we prefer to use simpler language, and in this particular case, price peg works just fine.