Thursday, April 21, 2011

Daytrader Strategy: Failed Indy

Over the years we’ve contributed a few daytrader strategies to the community, the base and break, overshoot support, and one of our favorites, the Indy.    We wanted to review a variation of the Indy today: short on failed Indy.

The name comes from a description of the strategy in which the stock is basing under  R1 /2 or daily resistance and is slowly getting squeezed from below by the ascending EMA.  Indiana Jones would often find himself in similar situations and would always find a way to break out of the impending squeeze, thus the name “Indy”.   It’s a great inflection point — it’s basically do or die and you can often get off great risk-reward trades around the pattern.   We mostly trade Indy long, that is we look for Indy set-ups on existing alerts from alerts we’ve added on previous nights.

However, when we’re looking short, then we also look for failed Indy patterns.   Today there was a nice one in $SLV which we thought would be interesting to the day-traders out there:
We were looking for a short trade in silver today (again) but the $SI_F chart was a mess and we couldn’t find any edge.  So we decided to trade the SI_F  off the $SLV which in contrast was printing a nice orderly chart.
There was no daily spot on SLV to short against but there was R2 which interested us –note nice ascending 9EMA.   This is a bullish Indy pattern in that stock is basing under resistance (R2) but is being squeezed from below by the 9EMA.   SLV poked above R2, and came back to test the EMA.    A true Indy would have pushed the stock away from R2 above for continued rally but SLV started to weaken as it re-tested the EMA.  The longer it sat on EMA the flatter the EMA became — the flatter the EMA the less strength it has.    What we had here was a possible failed Indy formation — exactly what you want to see if you’re short.

Now look at the chart below:  SLV went to re-test R2, now very much sitting on the EMA.   This is the do or die moment — at this time stock has to lift up and away or it will likely fail offering good short trade.     If you see the EMA weakening (flattening) as it was here, go short, with stop on top of the high.   Trade here was short around 44.99-45.02 with stop just above high 45.07.  This is the “do or die” moment in an Indy.

And Indy fail worked well here for a short — stop was not hit and you would have had a nice risk/reward trade short as stock quickly went to 44.66,  original stop was around 7 cents so as you can see very good R trade. On the SI_F entry was around 46.13 with a dime stop,  and the low on the failure was 45.75.

At this point a trader covers majority and can sit back, relax (write blog posts) and  leave on last partial (last 1/4 in this trade) at updated stop of break-even (which now is above the EMA) in case the short has more juice.   When we have last partial at break-even stop then we try not to micro-manage the trade and try to focus elsewhere.

Note the pattern can also be applied to the daily char.  For example, stock is basing and finally ascending 20SMA catches up, stock oftten then either rips up (usually the case, following trend) or fails.  Again, good risk-reward entry.