When a listed stock has a parabolic rise for any reason, we take note of the much desired price movement and watch for signs of eventual topping out, making it a prime example for a short scalp. This is what happened in KEMET Corporation ($KEM stock) last Thursday and Friday. KEMET announced Thursday that it will acquire NEC TOKIN from NEC. Since NEC TOKIN will be debt-free, Wall Street gave this acquisition a big two thumbs up as the combined company will have a much stronger balance sheet and greater EBITDA sending the stock up +40% in two days.
Looking for signs of increased volume on the 1 minute charts as well as watching the tape to determine that sellers were now stepping in (either long sellers taking profits or short sellers initiating positions), we patiently waited until we felt those two signs were being observed in $KEM. When the stock was up around +37% on the NEC TOKIN news, we started our short position at $11.65. As the stock rose but the tape painted bigger sellers/shorters were coming in, we were confident to add to our short position into strength. One of the keys to being a contrarian trader is not to get shaken out when things go against you especially when the tape indicates and reinforces your trade thesis. In this case with $KEM, as long as new sellers were stepping in and whacking bids we knew the buyers would eventually get exhausted and the stock would turn down because portfolio managers will always take profits on a +40% rise in a NYSE stock.
When longs take profits, short sellers start positions, and long buying diminishes, you get a nice stock fade down. That is exactly what we saw in $KEM when it slowly worked its way down from $11.60s to $11.30 in a hour's time. Once it seemed like the easy down move was reaching a wall, we decided to cover and run with the money on a Friday afternoon. If we had more time before the market closed, we would have tried to ride the short down further.
The $KEM short trade was successful and netted us profits of +$3,050!
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