In all honesty, as a student of computer science I never thought that one day I would squeeze profit from an international ransomware virus which causes devastating damage all over the globe. I am referring to the cyber attack WannaCry which specifically targets security flaws in Windows to spread throughout networks. It encrypts files of known file types and forces the possessor to pay a ransom in Bitcoins in order to get the virus to decrypt the files.
Whereas ransomware is nothing the cyber security sector has not seen before, the degree of propagation very well is. In addition, the exploit was well known by the National Security Agency, a fact which could cause further heated discussions.
All in all, the extensive damage the attack has caused has emphasized the importance of the cyber security sector. FireEye Inc. (FEYE) as a network security specialist could certainly profit from such a wake-up call. Consequently, a massive surge was triggered in the stock’s pre-market action giving us a significant gap up into the open.
As the background itself is never enough for us to enter a trade, let’s analyze FEYE’s three month daily chart. Due to the rally earlier this month, we are already rather familiar with it and the way it behaves. In recent days it consolidated consistently in the $14.20 to $15.00 range, giving us a great setup for a follow-up run. Commonly, we seek a short rather than a long on extended charts, however, a consolidation after a previous rally usually serves as a setup for another push through the previous highs.
As the floating stock far outreaches the average daily volume in the previous trading days and the daily volume greatly surpasses our minimum of three to five million, these numbers do not have to concern ourselves any further.
Even though we generally prefer a long position solely on a gap down, the underlying catalyst provides enough incentive to join the trend nevertheless. However, as the gap up is rather big compared to previous days, we can factor in some profit taking within the first couple of minutes, either right at the open or after a parabolic price move. The plan therefore is, to wait out this morning movement and to join the major trend subsequently.
For the purpose of waiting out the morning action, we use the Opening Range Breakout (ORB) of the first five minutes (Refers to the purple price levels in the chart). The moment we break the range at the top, we can consider our plan to be working out and seek a starting position with a risk level at the low of the day.
As we do not know whether or not our plan works out beforehand, we make sure to lock in some profits after a first ramp from our entry point. The plan usually is to let at least one half of our position ride until a trend change occurs. Hence, we simply take VWAP as a guide and let the chart do its thing.
The moment our entry price level is retested (10:39 AM) and confirmed (10:56 AM) and the stock taking on VWAP rather well, we can deliberately add to our position with an educated risk at our entry price level ($15.73).
As full dollar marks often times serve as resistance levels, I once again made sure to secure my profits along the way as significant levels over and under $16.00 acted strongly. Overall, though, we let a portion of our position ride the trend until the very end as we do not know whether or not the stock will eventually rally through these levels.
The very first time the chart broke a well-formed low was at 2:26 PM. Up until this point, all we had were higher lows again and again and a consistent will-power among the audience to grind the chart back over $16.10 even after multiple corrections. Thus, we finalized our trade by selling the rest of our position.
Even though I was able to record a comfortable gain (~ 0.13ct / share), I am not all satisfied with the trade at hand. The fast profit taking after adding a major portion to the position clearly shows missing resilience which I might not have needed here but surely will in other trades. With more emotional stability, I could have held the major position until the high of the day was retested. Such behavior can often times make the decisive difference between a subpar and an outstanding trade.