Last week, I justified my Northern Tier Energy trade by posting this chart:
As of today, here’s an updated and zoomed-in chart of NTI. See if you can spot what’s wrong with this picture: 
If you guessed “crazy volume” you’re WRONG! YOU LOSE! I put that there to distract you, and clearly it worked.
If you noticed that today NTI dropped way below the support line of the upward channel it had been inside for months, you win.
So I sold it. End of story. In fact, since I had already placed a stop loss order on my position, I was getting a sweet burn in at the gym when the order was executed. I didn’t even know the order had been executed until I got back to my computer.
Duration of trade: about 6 weeks
Net result of trade: about a 6% loss
Oh well. You can’t win ‘em all, and a 6% loss on a relatively small position is easy to shrug off.
So what the hell happened to Northern Tier Energy today that caused the technical breakdown? I have no idea. What do I care? I’m no longer a shareholder. And one of the benefits of technical analysis is that you don’t actually care what’s going on with the fundamentals of the company.
The high volume on the chart would typically be indicative of some news or major development with the company. On the other hand, the high volume could also simply be attributed to a single large institutional seller. Of course, it is also likely that many other people also had stop losses triggered today. When a stock that has been holding a strong technical pattern for a while finally breaks the pattern, if often does so on high volume for exactly this reason.
Stop loss orders have a tendency to cause a cascading effect on stocks when there is enough of them in place. This is one of the reasons for the infamous “Flash Crash” of 2010. A small drop in share price triggers stop loss orders to automatically execute sell orders at market price, which drives down the share price and triggers more stop loss selling, which drives down the price even further, and so on. At the end of the day, all the stop loss selling leads to extremely high volume.
I skimmed over my watch list today to look for something that seemed worth buying with the proceeds from the NTI sale, and nothing seemed particularly appealing to me at these prices. If I end up buying anything, you’ll see it here first!
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