XLK: Using RSI and Volume to Project a Potential Breakout Trade

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3 months ago

Here's an idea where we use make use of RSI and Volume to project the likelihood of a potential breakout trade.

1. XLK             has more or less trended higher since 2012 up till now. There was a period of sideways consolidation between Aug 2015 to Jun 2016. However, price has successfully breached the Consolidation Resistance of $44.60 on 12 July 2016 and traded higher to the 46-48 range.
Hence, XLK             is trading in an overall bullish environment.

2. Next, we turn our attention to the RSI readings. The main concept is to match support buying "valleys" with turning points against a visible RSI support level .
Let's take a look at labels 2a, b, c on the chart. These are 3 examples where we observed support buying in price corresponding to a RSI Support level of around 32. The most recent price action and RSI behavior, marked "d", from Nov 2016 is similar to 2a, b & c.

This suggest that price is likely to repeat a support buying move, similar to 2a, b & c.

3. Lastly, we now look at the sharp volume spikes marked out at 3a and 3b. Again, we noticed strong support buying action corresponding to the spikes in volume . Looking at the most recent volume profile marked 3c, we note that volume had spiked in similar fashion to that of 3a and 3b.

This indicates the possibility of a repeat of a support buying move as experienced by the market at 3a and 3b.

Given that:
i) price is in a bullish environment
ii) We see RSI support at 32 similar to previous "valleys"
iii             ) There is Volume spike profile similar to previous "valleys"

We project that price is likely to push higher, breaking immediate resistance at 48.00 and breakout higher. While not illustrated, there is also a potential for price to break out in a manner consistent with an Elliott Impulse Wave 3 move.

Any time from now, at a price no lesser than $46.00 and no higher than 48.80.

Stop Loss
Below $46.00.
This is the immediate support level .

Risk Management
We can size the short position based on the an Initial Stop Loss below $46.00.
This Stop loss should be shifted to breakeven level, if price is able to reach around 48.80. This will essentially minimize the risk of loss from this trade.
Also, we can expect the price to fully develop the up move by 18 Jan 2017. Hence, all positions based on this idea should be closed by 18 Jan 2017, if price has yet to reach profit targets.

Taking Profit
Based on price history, we may consider taking 60% profit at around $50 and 30% at $52. This leaves 10% to capture any potential extended Impulse Wave 3 move.

Alternatively, we can also consider refer to RSI (14) and look to close out the position at around 72.00.

Cheers and have a profitable week~!
3 months ago
Trade active
a month ago
Trade closed manually: HI all,

a) After the plan was posted, price traded to 48.00 at around 25 Nov and we saw resistance coming in. However the resistance move did not hit the stop loss and was sharply overpowered and price was able to break through 48.00 to trade around 49.57 now.

b) In the last sentence Risk Management section, we mentioned that all positions should be closed by 18 Jan 2017, if price has yet to reach profit targets.

While the overall trend help support the move higher, price was not able to hit the projected profit target. Therefore the plan is concluded and all long positions, base on this idea should be closed.

All in all not exactly a grade "A" breakout but still a profitable one.

a month ago
Good work, congrate... Just wounder what will happen on the 18 Jan 2017 ? and what do you refer to in "Risk management section" ?
Hi S_A,

This plan was crafted in Nov 2016. Under Risk Management, besides determining the Stop Loss, I have also worked out a reasonable Time Stop.

If price is unable to meet projected price targets by 18 Jan 2017, then it indicates a not too strong breakout momentum.

Hence the position should be close, to free capital for other breakout opportunities.

By the way, 18 Jan is based on linear projection and not related to Trump Inauguration date.

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