Thursday, November 10, 2011

Support Long example GDXJ

Excerpt from our newsletter tonight:

We had on a few ideas yesterday for support long ($OIH 120, $GLD 168, $SPY 120, $GDXJ 30.5-30.8 trend-line) and the only one to hit was GDXJ 30.5-30.8 trend-line bounce.
GDXJ trend-line bounce on 30.5-30.8 –  sometimes when we have these zones instead of exact numbers it’s difficult to find one hammer to go off of and instead we start partialling into the zone with a pre-set stop (say 30-40 cents).   This is what we did today with GDXJ buys starting at 30.87 and adds at 30.8, 30.6 and 30.57.    Once it hammered at 30.53 and bounced we had an exact stop (30.47)  but before that we were looking at a “bail point” of     around 30.4-30.3.

Of course you use smaller size when you are partialling into a zone because your stop is often wider (we rarely have a 50 cent + stop on a $30 stock).      We use these “partial in the zone” type entries also more often with ETFs which tend to chop around more than stocks and also when market is more nervous as panic often means overshoot.   
S1 (dotted blue line) was 30.8 and we were looking for overshoot into trend-line 30.5 (daily trendline on last night’s chart), hence the zone.  Start at S1, add all the way to trend-line, and if that didn’t hold, cut the loss on the whole position at a pre-defined number.  
You need a pre-defined number before you enter the trade so you don’t freeze and talk yourself out of taking the stop.  
To repeat: adding lower within a pre-defined zone is fine as long as you have a pre-defined stop.   When we started at 30.87 we were hoping very much it would go down to the bottom of our buy zone of 30.50 (but not any further than that :-) .   
Extended from EMA right into S1 intraday support/ and trend-line support from daily.    This is what you want in a support long.   Note that GDX was also hitting 50sma at the same time — the more stocks hit support from same sector at same time, the better the chances of success.

This bounce on trend-line is what we were looking at and happily, other traders noticed it too which is why it worked – you want spots to be obvious enough to be on other trader’s watch-lists but not so obvious to be a crowded trade.  Fine balance.

Nice bounce but we won’t get long on any other moves back to this trend-line as next time will probably go through.