Thursday, October 16, 2008

Bottom Fishing - Research In Motion Limited (USA) (Public, NASDAQ:RIMM); Potash Corp./Saskatchewan (USA) (Public, NYSE:POT)

Last night we said that a 38% Fib extension from yesterday's low would test support from Friday's lows. That's exactly what happened this morning, followed by a bar by bar shakeout and reversal. I traded the NQ on the lower timeframe based on this strong reversal pattern. I took a partial as price approached the early swing high. After that, we spent a long time on consolidation mode. At first I was hoping for a C&H, but things got a little sloppy. I was ready to bail if the 15 min. closed below yesterday's low. Luckily that didn't happen, and the market finally lifted and soared into the close.

The POT and RIMM trades were dual trades: in my retirement account and my trading account. In my retirement account I'm holding half into tomorrow based on the strong close.

8 comments:

yr said...

Jamie,
When do u usually place your stops for such morning star reversal patterns? Low of the morning star reversal pattern? Thanks

Jamie said...

YR,

On the day trade I used the low of the trigger bar. If you look at 1 minute timeframe, you'll see that it formed a tiny base at 68.00-68.11. That was the actual entry point. After that I expect a retest of $68.00 but it should not go below the widest stick in the basing area and should not close below $68.00.

Susan said...

Jamie,
In the definition of morning star, you mentioned that the real body of the star/doji should not overlap with the red bar. In the POT trade, it is overlapping the WR red bar.

Thanks in advance.

Jamie said...

Good eye Susan,

That's correct, the textbook definition of a morning star reversal pattern has no overlap between the bodies of the 1st and 2nd candles. Those usually have more muscle, but in this case, we see that by the time the pattern is complete, the bulls have shaken out the bears because the third bar closes at the open of the 1st bar as opposed to more than half way as in the textbook definition. To me that more than compensates for the overlap.

Yesterday we tested that area on the open and it carved out another morning star on the 5 minute timeframe (no overlap this time). I'm still holding this as a swing trade and hope that $68.00 is the bottom.

On an intraday basis, it is not always possible to find perfect textbook patterns, however, if the pattern is very similar, you can wait for confirmation and take a trade.

Susan said...

Thanks Jamie. Really appreciate your response. In the POT example, the red bar is strong, without any upper or lower shadow. Would you treat this setup as a morning star: If the red bar has upper & lower wicks but not a spinning top; forms a bullish 2nd candle (suppose a star)and the 3rd bar does not close that strong.

Do you also see if the morning star is formed at a support or it does not matter that much.

For retracement trades - how much fib. level do you allow max. for the trade to retrace to consider a valid one? Any imp. criteria you look for apart from the fib. level.

I am going through your previous posts. It's a wealth of knowledge. You make the trades look so easy :)

Jamie said...

Susan,

In that example I would wait for confirmation. I usually look at the 1, 5, 15 min. charts and try to confirm on the other timeframes or wait and buy the retest of the base.

Yes, if it forms at support that is better. In the case of POT it formed around the 50% Fib. extension of the previous range so I was pretty comfortable with that setup as well.

Trading can be a challenge when we have market turns. This high volatility, sharp bear move was easy money on the short side, but now that we appear to be forming a bottom, the trading becomes more measured as we had too many false capitulations along the way. All this say that we have to adjust our trading to suit the market environment. Right now I'm finding it easier to setup my watch list with Fib. retracement lines for the previous day and look for either an extension or a retracement. if the stock gaps. I place the Fib from the previous day high/low to the ORH/L. For example ABX gapped down on Friday and slowly retraced 38%, carved out a tweezer top reversal just below downsloping 50 SMA on 15 min. I took a low risk entry on 5 min. inside bar and it generated almost a 1 pt. gain. Everything came together nicely so, there were not caveats and no reason not to take the trade. For NQ futures price took out previous day high retested, carved out shallow rounded base on 5 min. and extended 38%. Same action on QQQQ if you don't have futues sub. Again, no reason not to take the trade. Another of my favorites is the C&H - FLS formed a handle at the base of previous day high.

I prefer shallow retracements up in the 38-50% area. Anything more than that can be tricky and needs a strong candlestick reversal pattern or support/resistance and/or MA and confirmation to convince me to get in.

Trading is not easy until you determine what works best for you. Once you determine what to look for and plan ahead. It will become easier. Set alerts intraday so that you don't miss the move.

Some days it's hard to find any good setups and that's when we end up bending the rules and taking mediocre setups that usually generate mediocre results. Stick with highly liquid stocks with decent spreads to avoid too much slippage in difficult trading environments.

Susan said...

Jamie,
I am learning to spot measured move patterns, esp. flags and C&H. I have definitely become a little better in spotting flags (thanks to your posts) but have had no luck with C&H - which is your favorite pattern :).

What type of intraday alerts can you set?

Jamie said...

Susan,

I set alerts if a stock pivots twice into a whole $ number. That can be over a period of hours or days. The third test often sets up a good B&B or C&H. Other areas to set alerts are Fib. retracements, and support/resistance zones.