How I Went Short Medtronic (MDT) for Profit

08/26/2010 12:01 am EST


Michael Bellafiore

Author, One Good Trade: Inside the Highly Competitive World of Proprietary Trading

I make trading decisions based upon three factors: Intraday fundamentals, reading the tape, and technical analysis. I traded Medtronic Inc. (MDT) today using all three areas of analysis to execute two shorts. These are trades that if I made 1000 times, I know I would profit.

Here is how I evaluated all three areas:

Intraday Funamentals

I trade stocks with fresh news. Today, we had new news with MDT:

“The company issues downside guidance for FY11, sees EPS of $3.40-$3.48, excluding non-recurring items, versus $3.48 Thomson Reuters consensus. For FY11, based on estimated market growth of three to four percent, the company expects revenue growth in the range of two to five percent on a constant currency basis, down from five to eight percent previously.”

Missing on revenues is more important than the bottom line, generally. When a company offers fresh news that its revenues for the full year will be worse than expected, this is a candidate to finish at the low. This fact alone can cause the stock to trend cleanly and negatively for the entire day.

Technical Analysis

MDT gapped down to near 32. To find the next support level, you must use a two-year chart to find 30. On the one-year, MDT was below all support.

On the Tape

On the open, 32.20 held the offer, showing an aggressive seller. And then there was a huge battle near 32.

Click to Enlarge

The First Trade

MDT finally moved away from 32 after a huge battle. It found 31.60, created a deep red candle on our intraday charts, and got us excited about our short. 32.75 held the offer. This is a short. There is no support on the long-term charts until 30 (maybe). Intraday, the sellers have won the first two battles. The fresh news offers a potential pattern for MDT to close near the low. The trade is to short 32.74 and hold until the intraday downtrend is broken.

The Second Trade

MDT traded weakly down to 30.85 after failing from 32. The market held the 1050 and 1040 futures levels and bounced. MDT then approached 32. When a stock has failed from a level, makes a sharp downward move, and then later re-approaches this level, we almost always re-short.

By Mike Bellafiore, author, One Good Trade: Inside the Highly Competitive World of Proprietary Trading
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