Thursday, March 18, 2010

Overshoot Strategy

There's a certain trade we call "Overshoot strategy" that we'd like to discuss today. It's what we look for when we are looking to buy support and the stock goes right through our alert at primary support like a knife through butter. We always wait for some kind of reversal before we enter support (at least for day-trades). If the stock grinds through primary support without any kind of reaction from buyers then go back to the daily chart and look at secondary support. Often a stock that has gone through primary support finally finds footing on secondary support. First target for day-trade is a move back up to the first support. The reason we're writing about this now is because of two examples that showed up today:

DVN was on our watch-list for a possible support buy at the 200 SMA near 66. The stock didn't even hesistate at the number and showed no signs of reversal until it hit the secondary support near 65. Entry would be on reversal off 65 with stop under.

MOS went through the 50SMA without any problem but finally found footing on secondary support of 59.17.

If a stock/sector you are watching for support goes through primary support with ease then go through the daily chart again and set new alerts at secondary support. Chances are that the new alert will develop into a decent trade. As always, wait for the reversal at a level found on the daily chart before entering. We never enter in no-man's land.