The first trade in JWN was submitted by a reader. The entry and partial are his and he asks how he could better manage the trade. He was targeting a 50% Fib. extension.
The first point is that JWM is a regular gap with an expected target of 38% from the previous day high to the ORL (Trader-X). That target as we can see from the chart, was achieved within a tiny margin of error. Always sell/cover into strength, so plan to exit at least a partial as price approaches the target. After that don't allow price to retrace more than 38%. That is a normal retracement, and if it takes place on declining volume, there's a good chance that the trade can continue to move in our direction. I measure 38% including the trigger bar and estimate that $28.10 plus wiggle of 5 cents was a good place to set a stop.
The story is a bad retail sales report, but nothing over the top. The main observation I have is that the entry takes place after 3 WRBs so the main thrust is behind us.
If we look at the 3 minute time frame, we see that after the first two 15 min. bars, it carved out a 3 PP base at the ORL, with three consecutive lower highs (ABC). That setup is a relatively low risk scalp. Take a partial after 3 WRBs.If you use multiple time frames, watch for candles with upper wicks on the lower time frame as potential areas of resistance, if they don't hold, take some money off.
The next trade was my gapper trade today. FCSX was an earnings miss with a really wide gap, trading in the daily spot (all time lows) with no support. If a stock gaps too wide don't use the regular Fib. extensions because they don't work.Here I'm trading a pattern - bearish flag, so my extension is from the top of the pattern to the base. The normal expectation for patterns is 100%. But this is a $17.00 stock, so I have to be realistic in my expectations. Also there's a caveat here because the flag breaks when the down sloping 5 period EMA is still a good distance above price. So I took a partial after almost 1 pt. to mitigate any potential reversal. FCSX didn't reach the full extension. But I'm keeping this one and VMW from the other day, on the WL for potential future weakness.
11 comments:
I also traded FCSX today... small world.
Cool, so did Harvey Walsh.
Caught a really nice short in LEH after it failed at the 20 EMA.
I like the confirming lower volume pattern in LEH leading to the failure. Nice trade.
FCSX big drop at the open 19.85. First thought test the previous low of 18.39 as is close enough... for an over shot to .38 fib(10.9)...maybe next week!
Jamie,
I have a few questions regarding bear flag and would appreciate your help.
1. You mentioned that you used Fib extn. Do you use Fib extn. in case of all bear flags or only on those that has gapped up or down and then formed a flag?
2. You used Fib. extn. from the top of the pole to the base. By base you meant the lower parallel line, right?
3. What is your initial target level when you use the extn..100% (considering that there is no PP or support thru that area)?
4. If there is not much of a volume decrease during the flag formation, is it still worth taking the trade on the breakout?
Susan,
1. You can use the Fib. extension for all bear flags. On the RIMM trade today, using the 15 min. timeframe, if you extend the Fibs. from the top of the flagpole to the BO point, the 100% Fib. ext. level is approx. $110.00.
The Fib. ext. gives you a good target but you also have to look at support/resistance levels and market conditions. Under current bearish market conditions bear flags work better than bull flags.
2. Yeah, technically it should probably be the BO point, but for pennants, it is sometimes easier to use the midpoint like I did on FCSX.
3. Not sure I understand the question. In this post, I was trying to show that we need to have realistic expectations. FCSX had just gapped 10+ points so unless the co. is bankrupt, it would not be realistic to extend from previous day high to ORL. Also, on a $17.00 stock, I'm very happy to score 1 pt.
4. No, volume contraction is a key element of the pattern. Just prior to expansion, volume should be quite thin, otherwise it might be forming base and break in the opposite direction.
Jamie,
You answered my third qn. in answer 1. What I meant was, are yoiur initial target 100% of the fib. extn.
I have another question regarding the 4th answer.
You said "Just prior to expansion, volume should be quite thin, otherwise it might be forming base and break in the opposite direction."
Even in base and breakout, there must be a volume contraction. Then how to differentiate between a flag and B&B in the opp. direction.
I am trying to learn from your daily trades. You are a great trader.
Susan
Susan,
A flag pattern is a continuation pattern - Flag pole, flag, flag pole.
However, not all flag patterns are successful.
So if you look at RIMM 3 minutes today between 11:30 and 12:30 EST. After the flag (pennant) broke out, it carved out 2 WRBs on big volume, but then it stalled and made two pivots into $112.00. At that point it was attempting to build a base and reverse. That attempt to build a base took place on quite high volume relative to the BO. The point I was making in #4 is that the volume contraction is important otherwise, it might be pause before a reversal.
Thanks Jamie. It is clear now :)
Have a nice weekend!
Thanks Susan, good weekend to you too!
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