Technical Picture - New Recovery High

A mixed start on Tuesday with choppy base building persisting well into the afternoon before a late day run to fresh new 52-wk and recovery highs. Thus Monday's retest of the base was successful and we rally on. The lack of volume implies few bears ie. no short squeezes as the bulls party on.

Gap Trade - PRGO

PRGO opened with a wide gap and immediately took out the ORH. Volume = momentum on these wide gaps and since PRGO's volume is strong, we want to get in.

Since there's no identifiable chart pattern, move from 15 min. to 5 minute timeframe to find a suitable entry point. Price consolidated in a narrow range close to 5 EMA so I entered long. Place Fibs. from previous day - late day lows ie. beginning of last leg up - to ORH and target a Trader-X style extension.

As long as the stock continues to carve out higher highs and higher lows, we can be hopeful of further extensions. After exiting the initial trade, we wait to see how price consolidates. Price consolidates in a narrow range on low volume (price/volume contraction ahead of expansion).

Place buy stop order just above the highest point of the consolidation base after two pivots into the base. The third test of the base is the anticipated BO point as depicted on the two trades below.

Solars Rule

Solar complex gapped up this morning. All of these gapper trades have the same characteristics - bullish shallow rounded base, NRBs, and big volume on the expansion. The traditional (old style) Trader-X gap long is back. Must be the start of a new bull market! Place fibs from PDL to ORH or early reaction high.

YGE from Briefing.com; FSLR from WL and PAYX (not a solar) from Trade-Ideas scanner.

Trader-X Rules

Inspiration and trading insights from Trader-X.

1. Five rules for life;
2. Fibonacci rules;
3. Simplified trading rules.

Collect the entire Trader-X series in this handy Jack Bauer messenger bag.

Potpourri

The TSX was down today due to technical problems and it threw me off. Whenever, I trade Canadian stocks such as gold, energy, agchem, I like to trade both exchanges. So, when TSX was down I got a little anal and missed the gold trades altogether. I managed to snap out of it in time to catch half of the Agchem play.


POT was a continuation play from yesterday's gap and extension. With a weaker $USD, gold, commodities have a chance to rally. Price rallied into the R-zone, consolidated, and moved out for one last wave. I drew trendlines on all of my 1 minute charts today because prices were extended after yesterday's 5% jump, and I didn't want to overstay the trades.


For many stocks with big moves following yesterday's FOMC, it didn't make sense for me to place my Fibs. over yesterday's trading range, because that would give me unrealistic targets.

The MS chart above, carved out a perfect cup & handle pattern. The normal measured move is 100% from the low of the cup to the base of the handle, however, today it stalled after closing above the R-zone and reversed, so I exited the trade.

Both JOYG and BUCY printed really wide opening ranges and here we used Trader-X guideline #4 for best results. This means you place fibs from ORH to ORL. Price consolidated in the R-zone midday and allowed for a low risk entry back up to the ORH, followed by a small extension.

As you can see from the 1 minute chart of JOYG, after taking a partial, price is far away from the trendline. Under normal market conditions, expect some sort of pullback or consolidation when price moves too far, too fast. This happens either through price or through time, or a combination of both like JOYG, which initially moved sideways (time) and then pulled back towards the trendline (price). BUCY consolidated the move more through time as it managed to hold the ORH EOD.

Gapper Continuation Trade - Amylin Pharmaceuticals, Inc. (Public, NASDAQ:AMLN)

Susan asked about AMLN in the comments yesterday. If you read my response, you'll see why AMLN was on my focus list this morning.

Since this stock is not a gapper, place fibs. using Trader-X guideline # 1. When price breaks out of R-zone, it has a nice thrust to the PDH where I take a partial. Was hoping for a consolidation, followed by an extension, but I got stopped out.

Not a lot of good setups today because the markets were extremely choppy, but while I was perusing my biotech WL, SQNM caught my eye. The base is somewhat choppy, so I didn't put a lot of money to work here (unfortunately). On the B&B setups I like to place my fib. extension lines from the low to the base. Took a partial at the 50% extension and exit as price approached 100%.

Gap / Fibonacci - Joy Global Inc. (Public, NASDAQ:JOYG)

JOYG, from the watch list, gapped up and formed a bull flag at base of ORH. Place fibs. from previous day low to ORH. Took a partial as price approached 50% extension. When that candle completed, it carved out a bearish shooting star so I waited for confirmation and exit the balance.

Reference: Trader-X guideline #2

Simple Analysis to Understand Fibonacci

The purpose of this post is to review a couple of charts with and without Fibonacci lines so that traders can get a better understanding of the usefulness of Fibonacci as a trading tool.

The first chart is the 15 minute BTU with support/resistance gap openings and congestion zones mapped out.

The second chart is the same BTU chart with the Fibonacci retracement and extensions added. The trade in question was Thursday December 4th. Susan shorted on a break of the coiled spring (price/vol. contraction), partialed at the 50% level and closed at the ORL which lines up with 62% Fib. level. She re-entered after price consolidated at the PDL (previous day low) and exit at the 50% Fib. extension level.

The key take away here is that if the Fibonacci lines are drawn as per Trader-X guidelines (#1) in this setup, the Fibonacci retracement zones (38%-62%) correspond to key S/R, congestion areas. Those are areas where price could typically find support and consolidate or retrace. If you're trading in the retracement zone, you have to manage the trade closely. Once price moves away from the retracement zone, and assuming the setup is good, it is more likely to move to the next level because there's nothing in the way.

Fibonacci lines are a mathematical tool to help traders with entries and exits. It's much easier to map out Fibonacci lines than all of the actual S/R, gaps and congestion zones. The math, which is not my forte, has an uncanny way of lining up with the key spots.

In addition to the guidelines set out by Trader-X, I have a few of my own. Long time readers know that when I trade chart patterns, I like to place Fib. extension lines from the high/low of the pattern to the base. For example on a C&H, I extend from the low of the cup to the base of the handle and target 100% extension. That's based on textbook measured moves of chart patterns.



The chart below of ABX (TSX) is a 3 PP base - box play. In this type of setup, I prefer to place my Fib. lines from previous day high to the pivot point base rather than the ORL. Why? Because the base has been forming over several days and is thus more significant than the open.

Here again I've mapped out the real S/R zones and Fibonacci. They're almost identical. I traded ABX on Friday as depicted below. On the first test of the R-zone, it held as resistance and price moved to the 100% extension. I had planned to short again if and when it broke out of the retracement zone to the downside around 2:30, but that didn't happen and I moved on to something else.



This post has been selected for Dinosaur Trader's annual Best Stock Market Blog series coming soon!

E-Mini Futures Gap - Fibonacci Retracement Trade

Fibonacci Extension from yesterday's low to 15 minute ORH as per Trader-X Fibonacci Holy Grail - # 2. The trade sets up when you see a tradable candlestick reversal pattern at one of the Fib. retracement lines.

Wait for candles to complete and confirm the setup, don't anticipate. Partial when price retests ORH and hopefully an extension will develop, notwithstanding a bearish reversal pattern.

Gapper Dummy Trades - Garmin Ltd. (Public, NASDAQ:GRMN) ; Buffalo Wild Wings (Public, NASDAQ:BWLD)

Once in awhile, a stock gaps, breaks daily support on the open, and runs all day. GRMN was the prefect candidate on another earnings disappointment. Trader-X style. I'm almost certain X was in this trade today!

BWLD initially looked like it might form a bullish C&H, but all of sudden it drooped over and set up the perfect inverse C&H pattern at the whole $ dollar base. Thought it might fill the gap, so I held past the measured move, but then I decided to fold. This stock has such a wide spread at times, so if you don't exit when you want, you'll end up giving back too much in slippage.

Gapper Dummy Trade - The Kroger Co. (Public, NYSE:KR)

KR gapped up and carved out a mini base on the 1 minute time frame. I micro managed this trade because gapper longs often don't have much muscle in this bearish market. Basically, I'm allowing for a retest, but once price moves in earnest, I'm looking to exit on the first sign of weakness. After the retest, KR broke out of the second base and had a nice run. As it formed the third base, it printed a higher high and immediately retraced. That third base is a three point base and if it fails price can reverse sharply so I tightened the stop and was stopped out.

The top is just pennies shy of the 38% Fibonacci extension of the previous day low to the ORH - Trader-X knowledge.

Gapper Bear Flag - BHP Billiton Ltd. (Public, NYSE:BHP)

BHP was a Briefing gapper. It carved out a bearish flag-like pattern. It wasn't really obvious from the volume that this was a flag. I usually like to see a clearer sign of declining volume. However, the 5 minute time frame (below) was clear in its rejection of price at the declining 20 ema and I decided to take the trade. I took a partial after 3 consecutive WRBs and was stopped out when price reversed after carving out a hammer.


OXY set up out a low risk entry at the base of yesterday's high. Once in the trade I wasn't really feeling any momentum and decided to play a textbook Trader-X exit at the 38% Fib. extension of the previous day low to the ORH.

Gapper Dummy Trade - Deere & Company (Public, NYSE:DE)

DE was a Briefing.com earnings gapper this morning and had strong pre-market volume on my Trade-Ideas Scanner. This is how I select my gapper focus list. I look for big volume in pre-market because, presumably, it will continue into the trading session.

As you can see from the 15 minute chart above, DE broke down fairly quickly and I thought it might go without me. Luckily, we got a nice bear flag on the 5 minute time frame, and I was able to take a low risk entry on the bear flag BO. Stop above last red bar in the flag. It fell right into the 38% Fib. extension of the previous day to the 15 min. ORL and then bounced. (Trader-X knowledge).

A second trade was possible around midday when price failed to take out the 10 period EMA in a series of NR offsets. I had to leave shortly after 1:00, so I couldn't take advantage of the setup. Hope some of you were in there.


MOS was an HCPG trading list pick from last night's newsletter. These guys and gal are in the zone, they're on fire.

Trader-X and Tom C.

Trader-X - The silence is broken.

Tom C. - Trader-X protege has a new blog. Tom's blog boasts a witty name "EST. 2007". Okay, it's late and I'm feeling a little brain dead. EST - Eastern Standard Time or Expressed Sequence Tag???

Dummy Gapper Trade of the Day - BIDZ.com, Inc. (Public, NASDAQ:BIDZ)

Some of the criteria I use for selecting gapper setups are:

1. Open above or below previous day's high or low. The rationale here is taking out recent support/resistance. Stocks that gap within the previous day's range have S/R to breach before expanding. So I ignore these because I have my watch list of familiar stocks for that. On any given day, at least a handful of the WL stocks gap, so I don't need more of these to clutter my focus list.

2. Volume

When I first started trading gaps, if volume was not high in the early going I would lose interest and move on to something else. Later on when I became aware of the power of NR7, I realized that there was money to be made from gappers that were slow to get going, especially if the previous day's session was NR and inside and the stock was trending. The NRIB (narrow range inside bar) in an existing trend implies a pause ahead of the next leg or wave. A gap following a NRIB will often setup a shallow rounded base as a spring board to a momo vertical move. Case in point was DISH on Thursday, following Wednesday's IB on the daily. Yesterday BIDZ from the Briefing list, gapped up from an IB on the daily and formed a shallow rounded base on low volume. It setup a perfect dummy entry after closing above R2. After taking out the daily pivot high, it retested in an orderly fashion and continued on the next leg up.

PTRY was a name I picked up off of the Trade_Ideas pre-market scanner. In the 2-3 minutes leading up to the open, PTRY showed up several times as a high quality short (quality as measured by # of days).

It had gapped down the previous day and tried to recover but could not close above the declining 20 EMA. Late in the previous session, it started ticking down and this setup is a continuation play.

I traded this one Trader-X style using a combination of the 15 and 5 minute for confirmation. A weak open followed by a red inverted hammer inside bar. The 5 ema was still trailing price, so I needed the 5 to confirm the setup. I used the Fib. extension of the previous day high to the ORL to set my target. Initially, I was going to partial at the 38% extension, but when we got there, I thought it was going lower. After coming a penny shy of the half $ number, buyers started stepping in so I covered.

The only caveat in this setup was proximity to R2 which lined up with the ORL, so I watched closely to make sure that price took out R2 otherwise, it could setup a reversal.

Dummy Gapper Trade of the Day - DryShips Inc. (Public, NASDAQ:DRYS)

Seems like a while since I had such a momo extension from a gapper long. I highlighted DRYS in blue in the pre-market post as this is also a watch list stock for me. I waited what seemed like an eternity for the this cup & handle pattern to develop, but it was worth the wait.

Typical Trader-X style, no hurry - dummy setup. I used a combination of PPs (blue lines) and the Fib. extension of the previous day low to the ORH as my guides. I took a partial at the daily pivot and closed the position as price approached resistance.

Notice how volume drys up in the handle portion of the pattern and ramps up on the BO. Price/vol. contraction before expansion. Sweet!

Lots of nice trades off the WL discussed in comments last night. I'll post a few later tonight.

Trader-X

As I said in the past, Trader-X owns the gapper trade and is revered by all his readers, including myself. He has decided to hang up the blog after many years of teaching and mentoring. His genius was in developing a gap trading methodology that included only high quality setups and articulating precise trading rules. I will miss his trading insights and clever takes on politics and pop culture.

I encourage everyone to check out the Trader-X archives.

Thank-you Trader-X and all the best!