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Time to Buy Abbott Labs?

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We may finally have an edge on the long side.

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Tuesday trading in Abbott Labs (ABT) saw a modest recovery from Monday's gap down, with shares rising a modest $0.15 for a 0.32% gain at the $46.86 close. After 2 consecutive closes above the upper Bollinger Band -- and a very big gap-down decline -- the historical track record for ABT shows a statistically significant edge from the long side.

The Art of the Trade

Turning first to the daily chart of ABT: Last Thursday, the neckline of a bullish 10-week cup-and-handle base (46.31) was violated by back-to-back closes above the upper Bollinger Band prior to Monday's move down. It's this second-quarter, 3-day combination of events that we'll turn to now in our search for an empirical edge.

The Science of the Trade

I ran the ABT time series data for the entire second quarter, looking for 2 consecutive closes below the lower Bollinger Band, ending with a very big decline on the third day. This occurred 21 times, with 20 of 21 showing average gains of 3.2% within 8 trading days following the event.

There was one decline of 2.6%, for an overall return of 2.6%. An average repeat return of 2.6% projects to $48.27 -- just over its June high -- by Monday, July 6.



Trade Parameters

I'd consider entering near Tuesday's $46.86 close, using the empirical study above as a starting point, with a possible hold into the 2009 swing-high area of $57.39. A good swing stop is a daily close below $43.19.
Position in ABT.
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