After a relatively flat opening, the Dow and S&P futures decided to go down while the Russell and the NASDAQ tried to go up. That made it difficult to find a convincing entry until about 8:30 (Pacific) when the various markets finally quit arguing about direction.
The trend (as shown by the longer moving average) was still up from yesterday, and after two hours of waiting the Stochastic finally got oversold. I don’t trade the Stochastic by itself, but there were two other reasons to consider a long position at point “C”.
Depending upon the strength of a move, the three most common pullbacks are 32%, 50%, and 62%. At 8:30 we hit the 50% retracement of the rally from the morning low. At the same time we had just completed what some call a Measured Move. The distance from B to C is within two ticks of the distance from X to A.
Oversold condition, 50% pullback, and a Measured Move — three reasons to consider a long position here. My entry would have been the crossing of both moving averages. The question is whether your trading plan would allow you to hold through that overly strong first pullback. A stop below the pivot would have kept you in for the move.
Move to where? If we go to a new high, I always look for potential reversals at 127% of the depth of the pullback. Unless there is a lot of momentum, that is where I pull my trailing stop up close.
