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We have two central strategies around which we trade: 1) buying break-outs/shorting break-downs and 2) buying support/shorting resistance.
The two methods are the inverse of each other -- in buying break-outs we buy the break of the intraday base (our base and break method), and in buying support we buy the reversal on an extended move away from the base. This might sound confusing but it's not -- as you'll see in the following illustrations.
Buying support/Selling Resistance:
Here is an example from our newsletter: we had noted the overbought nature and resistance at 42 in the newsletter on AGU. The stock opened, bases over 40, and then breaks away from the base and flat EMA for a vertical move to 42. This was an excellent short spot against resistance as the stock had arrived at significant daily resistance via an extended intraday move. Note how it moved back to the EMA -- resistance shorts usually offer at least a primary target of EMA.
Good continuation down on the break of the EMA.
Support trades are in every way opposites of the traditional base and break breakout trade. We'll go into some detail on this in the AEM example:
We wrote in the newsletter the previous night that we would be buyers at 52. The stock went to 51.99 at noon; this was ideal as the best support buys are the ones that quickly break support and then reverse above. The trade was almost good for a run to the 5min/20 EMA --partial exit was reversal on the EMA. Not a big win but a good example of how to execute a support buy as the stock based around 52.6 and then dropped down to support away from the base. When buying support always buy the reversal on an extended move away from the base.
Let's follow up on AEM to get an important point across:
The base is your friend when buying a break-out through resistance or shorting a break-down through support. However, when doing the opposite -- buying support, selling resistance-- then you want to logically also be doing the inverse, buying the reversal on the extended spike down to support away from the base or selling resistance on a vertical spike up away from the base.
We've gone over the difference in how to buy breakout longs versus support buys many times in the newsletter however we still get questions on this often. Hopefully the following (very crude) diagrams will clarify the matter:
1. A text-book break-out long base and break through resistance. The daily number is 100; the stock bases one point under at 99 and then breaks the base. Do not wait for 100 to buy but buy the break-out of the base below, say at 99.2.
2. A text-book break-down short base and break. The daily spot is 100, you see a base with good volume at 101 and you short the break-down through the base for the dive down to the 100 daily spot support. Fill would be around 100.8 with stop on any reversal back to the base over 101.
3. a) At 100 there is formidable support and you want to buy this support for a bounce. The stock breaks 100 and then reverses up -- you buy it. b) Then you notice that it is forming a secondary base right at support. This is bad news if you're long -- exit as there is a high chance that the stock will go lower.
4. At 100 there is formidable support and you want to buy this support for a bounce. The stock breaks 100 and then reverses up -- you buy it. The stock does not form any secondary base and instead bounces hard. This is exactly what you want -- buying the stock at daily support but extended away from intraday base.
Remember: Base is your friend when you are buying break-outs through resistance/shorting breakdowns through support. But if you are doing the inverse, as is logical the opposite is true: it's your enemy when you are buying support, or shorting resistance.
GOOG was a buy in our newsletter at 600. The stock comes down to our spot (600.62) and S1 and bounces for 6 points. Great trade with buy on reversal over the spot/S1.
Couple hours later GOOG comes to test the area again -- remember what we have always said "buy the first test, short the second" or at least stand aside and pass. With the second test comes a base at support -- exactly what you DON'T want to see when buying support (but yes when you are buying break-outs).
Always remember, whether you're looking at intraday charts or daily charts, the more ducks line up in your favor, the higher the chance of success. Intraday - base/EMA/R1/ coinciding near daily spot is almost always a win. Daily: oversold going into support meeting trend-line and an important moving average is almost always a win. The problem of course is that most trades do not have everything all lined up nice and neat, and that's OK, but at least when they do then do put on more size and be more aggressive.
Note how the trend-line coincides with an oversold status, and the 200 SMA. This is the exact type of chart we are looking for going forward for potential swing trades.
Why is it that the more balls line up in a trade the more chance of success? Because some traders specialize in buying stocks that reach a certain oversold status, other like to buy off of the 200 SMA, others only look at trend-line support, -- once you get all these groups together buying at the same time and the same level, chances of a bounce are excellent. Think of being on top of a cliff and wanting to bungee jump. The first group (buyers of the 200 SMA) are like one thin rope on your ankle. It might hold your fall, or it might not as your weight might be too heavy for the supportive rope. The second group (buyers of trend-line support) are like a second rope on your ankle. Now the chances of bouncing as you hit the end of the rope are greater. The third group is like an additional supportive rope on your body, and so on and so on. And why do we say avoid buying support when there is news/heavy volume? Because that changes the play-book -- suddenly someone added a backpack with 100 kilos of rocks to your bungee jump and the chances of those ropes holding just got a lot less. If there is specific news on a stock we completely avoid support trades. If there is no news but heavy volume on a sector getting smashed then we change our strategy from buying on support to waiting for an extreme oversold move through support and then buying on a reversal with the support as the target for the bounce.
With break-out long swings you can to a great extent still use day-trade stops with swing trade positions. A good break-out should obey the usual rules of heavy volume, not coming back to the base, etc. However this is not true of swing trades on support where often the stock closes down right on support but gaps up the next morning. With swing trades on support you will often have to endure some pain but in a benign bull market there probably is nothing more profitable than buying an oversold up-trending stock into daily support.
Buy the break-out or buy support, but do nothing in between and whatever you do, never combine both. What is combining both? Buying a break-out (i.e. resistance), seeing it fail, and then holding until support. When is the only time we would add to a loser? When a stock is close to two support levels -- we start a starter position on the first, and add on the second -- note the difference that you are combining two of the same, two support levels, and not mixing up buys on resistance and support. How do we decide on size? The closer the first support is to the second, the bigger the starter position.
Other notes:
1) as our long-term readers know we like to trade off our own pre-determined list (newsletter selections from previous night) and not look elsewhere during the day. This helps us focus on charts we already know well and reduces the number of mistakes we make. We don't use any scans intraday.
2) once the stock has broken-out and after you have made your exit, don't stop watching the stock. Drag it to a "triggered" portfolio and keep an eye on all stocks that have broken out. Why? a) if break-outs are working, buy the dip to EMA/pivot point and b) as a tell since watching triggered alerts gives you a very good idea whether you're in a trend day (break-outs/break-downs working) or range-bound day (multiple failures)
3) EMA's can be a valuable tool if you know how to use them -- find out which EMA is important each day. Watch 1 min, 3min, 5 min, and if you wish (we do) the 10, 15, 30 and 60 min charts and their respective 20 EMAs. We make our decisions based on the 5 min chart but we watch the 1 min to place our entry. Also keep an eye on which EMA meets up with pivot points (especially R1). An ascending EMA combined with R1 usually makes for a very nice pull-back entry on a stock that has or is close to breaking out.
4) there is nothing better than a trend-day for buying pull-backs to the alert price or to the EMA (or even better a combination of the two if they line up).
5) we find EMA dip-buying works better earlier in the day than later in the day
6) for buying the pull-back always look for the ascending EMA -- flat EMAs have a much higher failure rate
7)
a) Trend days up buy breakouts, buy pull-backs to EMA
b) Trend day down short break-downs on daily, short rallies to EMA intraday.
c) Range bound days buy pull-backs to daily support, short daily resistance.Don't get these two mixed up! Do your homework and always have alerts on your list for they serve as tells on market behavior.
8) mechanical percent based stops are useless for our type of trading -- look for the base and trade around that. The base is everything.
Highchartpatterns.com HCPG/BTG (Base Trading Group)
Note: If you are keen on shortening the learning curve then ask us for some of the previous newsletters (for trial users/members only). We will forward you previous newsletters which discuss our methodology in depth.
