DHB Industries (DHB)

Company. DHB is "a global leader in high performance, protective technologies, including: state of the art ballistic technologies (DHB Armor Group) and advanced therapeutic technologies (DHB Sports Group)." (company website)

Among other things, DHB makes the armored vests so in demand in Iraq.

Buy. DHB stock had been moving steadily upward for some time and passed my $5 threshhold in October. When the company announced a big increase in earnings, followed the next day by the announcement that they had received a $60M purchase order from the defense department for body armor—believed to be the largest single body armor order ever—I snapped up shares.

The day after I bought, DHB made another big jump upward. My glee was tempered, however, by the fact that on the second day after my purchase, the stock opened just a tad higher and then fell precipitously on very heavy volume, wiping out most of the two day gains. The next day finished the job; DHB was back where the first jump started and below the price at which I bought.

Surely this is just a temporary setback, I thought. Irrational exhuberance has been checked, and further increases will take place at a more sedate rate. Indeed, for a few days that looked to be the case. But then more price drops brought DHB back to $6.

I have since learned that a big price jump that opens up a gap in the chart, followed by reversals that close the gap are known to chart cognoscenti as an exhaustion gap. When a such a gap occurs after a long run up, it may signal a climax top.

Sell. When DHB opened higher again today but immediately began to fall, promising the third down-day in a row, I put in my sell order.

True, the loss (2%) is well below my limit (8%), and DHB is still above the 50-day moving average. But my caution is heightened by the possibility that this was a climax top, reinforced by the the sudden drop in the +DI line (buying pressure), the ADX line (trend strength), and the Chaikin oscillator. Furthermore, all of this is happening in the context of a red-hot market that has brought the Dow above 10,500 and the Nasdaq above 2100.

We'll see how gutsy I am. If I'm right, this would be a good time to sell DHB short, on the assumption that it will continue to fall. Hmmmm.