Tuesday, September 22, 2009

9/22/09 Trade Review: DGX and LH

Today provided a sector play for clinical laboratories, and the traders at Trading RM were ready to nail it. Both Quest Diagnostics (DGX) and LabCorp (LH) have been on our radar over the past week, but on the downside. Both names were recently downgraded by Credit Suisse and they have shown relative weakness to the current bull market. On 9/22/09, however, upside news provided a great opportunity.

Through our customized filters, our traders noticed unusual volume coming into LH as it sprung to life from a tight range to a series of new highs. As shown by the Trading RM Real-Time chat window (at left below-click to enlarge), our traders got long around 11:29 CST to take advantage of the move. Knowing that LH and DGX often move in tandem, other traders got long DGX at the same time. The 15 minute charts for both stocks have been included below to illustrate the high correlation between the names.

The Real-Time chat window shows that many traders started to scale out of their positions within minutes to lock in profits. At 11:31 CST, news came over the wire that tax reform would decrease the liability of clinical labs (see bottom left below). These positive comments added fuel to the fire and the stocks continued on solid volume. Between the 11:35 and 11:40 bars, both DGX and LH showed signs of reversal. DGX had a bearish engulfing with the 11:40 bar closing below the previous bar; and LH showed a bearish doji. Seeing that the move was reversing and happy to sell into the move, our traders were getting flat by 11:36.

By seeing the unusual buying in LH, we were able to initiate long at 11:29 - two minutes before the upside headline hit the news feed. Additionally, by being aware of the sector correlation, we were able to double the action with DGX. This trade is a great example of why Trader RM traders are always ready to pounce on an opportunity, even during the midday lull.

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