Trading by the Numbers
Even I was surprised at how well the market followed the “rules” today. The combination of trendline channels and Fibonacci retracements and extensions produced plenty of action. Let’s start with the gap down opening.
Friday left us in a downtrend as show by the upper orange trendline. As soon as price moves well away from the second peak, you draw the parallel line. Within several minutes of the open, that’s where we bounced (point #1.) Any trade here would be fighting the trend, but look at point #2.
Other traders are watching as we close the morning gap, pull back to exactly yesterday’s close, and can’t get through a downtrend line. Several reasons to short. And the target? Several reasons for that, also.
At point #3 we hit a yellow trendline formed by drawing through two bottoms from Tuesday and Wednesday of last week. That’s also where we hit the orange parallel for the second time this morning. And just for good measure, it is the 127% retracement of that first pullback. An exit, but not a buy. For that I would need a divergence which didn’t happen.
This time the upmove broke though the trendline, which is often followed by a pullback as seen at point #4. The move was also supported by my two moving averages (not shown for clarity) and it is a 38% pullback. Three reasons to say we have reversed direction.
Can we find reasons for an exit around point #5. It’s a 127% retracement of the drop from points #2 to #3, and it’s also a Measured Move — the first rally from point #3 is duplicated by the move from #4 to #5. Two reasons to think there may be at least a temporary pause here and bank some profits.
As soon as we pull away from point #5 we can draw the upper blue trendline, followed by the lower parallel. As nicely as our measurements have worked out this morning, it’s not really a surprise that we hit that parallel just as we also hit a Fibonacci cluster. That’s a 62% retracement of #4 to #5 along with a 38% retracement of #3 to #5. Time to get on board for another rally to the top of the channel.
The trend is up, company just missed their quarterly earnings report. Stock gap down. How would you determine your entry point. When the market opened the next day?
I am a hit and run trader do not stay in a stock overnight.
Any help is appreciated.
chuck
Hi Chuck,
When a stock gaps down on earnings, even when the trend has been up, my tendency is to start looking for short sales rather than longs. But then on equities I’m usually looking for something longer than a day trade.
If you are working on an intra-day chart, I’d be watching for a short entry at about the center of the gap. If you measure from the recent high to the pivot low after the gap, a 50% retracement and the center of the gap may be about the same point, and will often be at least a temporary reversal back down.
If you are still thinking long, there are too many stocks with good earnings still in uptrends. I’d be looking somewhere else.
Hope this helps,
Lowell