The MercadoLibre (MELI) Breakdown

30 November 2011

I'm going to be completely honest and say that I absolutely know nothing about MercadoLibre (MELI) when it comes to their company and their products/services that they offer, but Mike K in our Trader Network brought them up as a potential pairing with the Amazon.com (AMZN) (post that I did earlier this week), so I thought it'd be appropriate to go over MELI as well.

So for this particular post, I am going to focus solely on the technicals of MELI:

Unlike the S&P and other indices, MELI maintained its upward trendline off the October lows when the market retraced 61% and broke trend-line support.
As a result, MELI has done a great job of weather the markets in the two weeks leading up to Monday. Back in mid-October, MELI created the perfect bullish island gap reversal, which it has greatly benefited from, but the price pattern appears to be maturing some.
That leaves us with two significant gaps that likely need to be filled. Let's not mention the fact that the S&P has two large gaps now of its own to fill, and you got the potential for a significant pullback in MELI.
If it breaks $80, look for a move to $76.50. After That I think it goes downward to $60-63.
However, its highs of late is $89.99, that means if it can hit the nice round $90 price mark, we could see it make a run for the magnetic $100 price level (kind of like a penny stock making a run to $1.00 for the first time).
Volume looks average for the entire year so there are no clues there.
Support and resistance is well defined in the chart below.
If this market can't sustain the latest rally in equities (which ultimately I don't think it will) look for a double top to be put in place in the short-term and to make that move I detail above rather quickly.

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Comments

+1 #1 MikeK 2011-12-01 10:43

The hedge trade system methodology confirmed definite MELI short/ AMZN long about 15 min. ago. Excellent backtesting results on this pair. The more highly correlated the equities, the more reliable are such trades. Now it is up to the trader to acheive advantageous entries in both trades and I recommend a 2% stop / limit. I've developed and improved certain rules for trading these pairs. Bias of the original trade signal should be maintained, but interim trading is also useful using signals and the traders ordinary tools for loss control. The trader should not exit any position simply to lock gains IMA
I will update this thread if a changed signal occurs. I intend on trading this pair myself.

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+1 #2 MikeK 2011-12-01 14:03

New pair Trade emerging possibly within next few trading sessions GG /ANV

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0 #3 RyanMallory 2011-12-01 17:19

Thanks Mike for the update on the GG/ANV pairing update.

Based on your first comment about not exiting trades to lock in gains, could you tell me more about that? does it only pertain to locking in gains on one side of the trade or both?

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0 #4 MikeK 2011-12-01 18:13

My studies reveal that pair trading equities in similar industries or sectors result in the greatest returns. Hedge trading methodolgy accurately intiates trades at the point of maximum divergenge. Entries will not be simultaneous in mant instances. Since the equities trade in similar industries many times the price trends in same direction thus trailing stops are used to avoid a loss (wash)of gains during strong trend events. The "stopped" equity position should be re-initiated when the strong trending condition slows or pauses, while the trending gainer should be maintained with trailing protection. Trading the system from signal to signal results in substantial gains over 80% of the time, but using the system with trailing stops increases projected results by about 50%. Arbitrarily selling a gainer simply to secure profits (say @ 5%) very many times would negate 2-4x the eventual result. Trending equities- typically continue to trend. I've studied divergence in charts for a very long time, but was unable to quantify / quantify and time the point of reversal and reversion until my discovery last summer. Since then I've been studying counless pairs and trade execution/ performance improvements. I entered the MELI/ AMZN trade positions simultaneously today, but that is not always the case. This pair simply had unique characteristics that formed on my typical charting indicators. MELI/ AMZN is a very good pair, almost as if large traders rotate between the 2 stocks... only speculation. http://stockcharts.com/h-sc/ui?s=MELI&p=D&yr=1&mn=0&dy=0&id=p25087788636&a=249976428
The system works well because it allows the investor to remain in the market during periods of volatility with a reasonable measure of security.

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