Monday, April 16, 2007

Dummy Trade of the Day - Downey Financial Corp. (Public, NYSE:DSL)

DSL gapped up on high volume and reached the 38% Fibonacci extension shortly before noon. During lunch it carved out a bearish evening star reversal pattern and proceeded to pullback in an orderly fashion. The 16th bar had a volume spike which foreshadowed the end of the pullback. Three bars later we had a bullish engulfing pattern just above the the rising 20 period ema which allowed for a low risk entry. Price climbed back up to the morning highs on increasing volume and eventually surpassed the 50% Fib. extension before coming back in at the close.

These types of pullbacks are fairly easy to spot from the gappers. In my experience they work best when all of these elements are in play:
1. volume spike just before the completion of the pullback;
2. price stays above the rising 20 period ema on a closing basis.
3. common bullish reversal pattern marks a change in direction - hammer/inverted hammer, bullish engulfing bar, tweezer bottom, piercing line...etc.
4. declining volume on the pullback and increasing volume on the reversal rally.

I also prefer smaller, tighter candles with small shadows.

No comments: