Praise for Trading from Your Gut

75
Initial Displacement
Secondary Displacement
DAN (Dana Holding Corp.) NYSE
29-May-2009
Op 1.41 Hi 1.41 Lo 1.26 Cl 1.31
Chg -0.09 (-6.43%) 
Vol 899.9K
DAN (Daily) 
Mar
9
16
23
Apr 6 13
20
27 May
11
18
26
Feb
9
17 23
2009 12
20 26
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
2.75
FIGURE 4.7
Dana Holdings price displacements 
Note how the price oscillates around the $2 level after the initial
rapid price displacement. The price climbs more than 150% in two
days. On the third day, it opens and climbs to $2.75 and then drops
more than half its value while setting a low of $1.35 before finally
closing at $1.70. The following day, it continues to oscillate around
From the Library of Daniel Johnson

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$2, with a low of $1.65 and a high of $2.50. The second day’s range
of 85¢ is considerably lower than the first day after the large dis-
placement’s range of $1.40. The oscillation continues the following
day, but the range is reduced even further to about 40¢.
The price descends for a few days and then begins to oscillate
around a new lower equilibrium point of $1.50. These oscillations
also continue for a few days.
The initial displacement resulted in substantial oscillation and
the subsequent displacement also produced substantial oscillation.
A sizeable price movement almost always causes a large increase in
volatility as the price tries to find a new equilibrium point.
The one major exception to this rule is that price movements
can displace and then very quickly return to the old price level. This
tends to act similar to our fishing pole with the weight on the end if
we moved it up sharply and then just as sharply moved it back down
to its original position. It would create a large overshooting on the
upside, followed by an oscillation of high volatility around the new
equilibrium point. Consider the chart for Dry Ships, Inc. (DRYS), in
Figure 4.8.
Note that the price move from early April, when the price of
DRYS was around $5, to its peak of over $11 just a few weeks later
in early May represented an increase of more than 120%. No doubt
many of the anxious buyers who were willing to pay higher prices
during the run-up from $5 to over $11 were thinking of the price
just a few months earlier, when DRYS traded over $17. Others
might have been thinking of the highs of the previous May, when
DRYS traded over $110. Compared to these prices, a run-up to $11
must have appeared small.
76
T
RADING FROM
Y
OUR
G
UT
From the Library of Daniel Johnson

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