This week I thought I'd share a strategy for trading stocks rather than futures.
Lots of people spend a long time seeking out undervalued stocks a la Warren Buffet (a perfectly valid method as long as you know what to look for – see ‘The PEG Factor’ in the Buy and Hold section), but this setup does pretty much the exact opposite. We’ll be looking for a stock that trades up to historic resistance levels, and then makes an abortive attempt to break out above this resistance – failed breakouts are often termed ‘fake-outs’, although this implies some sort of market manipulation that may not be the case – when the stocks sells off again below the resistance, we enter the market as sellers. As well as price-action, we’ll be taking a very close look at volume spread and the Arms Index, and using divergence with an RSI to confirm an overbought state.
Though this trade sets up in a pretty long timeframe, the trade itself is unlikely to last more than a week or so – hence it’s classed as a swing trade.
Parameters for Sells (no buys for this setup)
You will have significantly more success with this setup if you look to other indicators for confirmation. Bearish divergences with volume and momentum oscillators are both useful clues that the stock will be unable to sustain the breakout, and you could also look for weakness within the sector as a whole at the time of the breakout.
Lots of people spend a long time seeking out undervalued stocks a la Warren Buffet (a perfectly valid method as long as you know what to look for – see ‘The PEG Factor’ in the Buy and Hold section), but this setup does pretty much the exact opposite. We’ll be looking for a stock that trades up to historic resistance levels, and then makes an abortive attempt to break out above this resistance – failed breakouts are often termed ‘fake-outs’, although this implies some sort of market manipulation that may not be the case – when the stocks sells off again below the resistance, we enter the market as sellers. As well as price-action, we’ll be taking a very close look at volume spread and the Arms Index, and using divergence with an RSI to confirm an overbought state.
Though this trade sets up in a pretty long timeframe, the trade itself is unlikely to last more than a week or so – hence it’s classed as a swing trade.
Parameters for Sells (no buys for this setup)
- Identify a stock that trades on moderate to high volume and is trading close to a 52-week high.
- Wait for price to break out above horizontal resistance at the level of this high, but then reverse and close back below it. Sell at the subsequent open.
- Your stop should be the recently made high above resistance to begin with, and should then be trailed at the high two days prior to the current trading day. Keep trailing your stop in this way until you are stopped out for a profit.
You will have significantly more success with this setup if you look to other indicators for confirmation. Bearish divergences with volume and momentum oscillators are both useful clues that the stock will be unable to sustain the breakout, and you could also look for weakness within the sector as a whole at the time of the breakout.