After a tumultuous winter (where price really hasn't gone anywhere) we are starting to see some early signs of a trade-able bottom within off the higher time frame charts. How much of the recent bullishness is due to normal and how much is actual real buying is another question for another time. The point of today's post is to highlight what I consider to be a very realistic and trade-able 'setup' that appears to be forming at the moment. We are traders and when a setup that is within our trading plan presents itself, we must act. Indeed, one shouldn't really get upset at trades that fail, only at how well you stuck to your trading plan and traded your setup. If the setup sucks, well that is one thing (and the process of vetting out setups is a task in itself). If however, the setup works and you simply can't follow your plan, that is quite another problem all together.
So on to the 'setup'
As a Rational analyst, I first must ask myself what fundamental developments would suggest a rally. Here I believe the much anticipated public stock offering of related Exchange Traded Funds (ETFs) is a fundamental catalyst that may drive price higher over the short term. IPO's are usually associated with a bunch of fan fare and public hype, so to see a 'buy the rumor' scenario develop here into the event would not come as a surprise at all.
So now on the the chart.
Technically, I always want to find at least 3 independent reasons to take a trade (or what we call a setup). Here you can see one setup we teach in our programs, The Hollywood Nik. Nik loves double bottoms. But he won't consider the trade unless there has been a confirmed momentum divergence and the double bottom's risk is half the anticipated reward should price return to the level of the previous down move. Here you can see all of those conditions have been met (except price has yet to confirm the ) and he is simply waiting for the market to confirm his last criteria before taking the trade. He is more then happy to get filled on a break of $238.64 and will risk to the bottom of the 'W' or $209.99. His target is a test of the highs of the range (and the 50% level near $303). This is more then a 2:1 reward to risk taken and even if he is only 'right' 50% of the time (that's a lot of losses!) he is still profitable. From my personal experience, W bottoms are usually about 70% accurate, so you do the math. The point here is, he is NOT expecting for the setup to work 100% of the time (which is simply unrealistic) but he is comfortable and profitable. Why? Because, when he is right, he makes sure to get paid!
That's all for this post. I hope you can use the information to your benefit and lets see how does heading into madness!
aka The Rational Investor
p.s. Q2'15 semester of RISBTD (where we teach exactly what you see above plus a whole bunch more) starts in 1.5 weeks, last call.......