We’re all about looking for a tradable spot for reversion to mean trades, and then waiting for it to hit. Sometimes it hits, sometimes it doesn’t, but it’s how we trade.
An hour ago we wrote:
What do we mean buy “buy on reversal, stop under”? This means that you wait until the stock/future hits your support level and reverses — you buy your number with stop at the low. In this case the buy was the reversal back to 1710 with stop just under 1707.7
Our first target usually is the 9EMA (in this case 1718 as we posted). 8 point target trade for just over 2 point stop. Good risk/reward.
That’s exactly how we trade support long/resistance short reversion to mean trades. The up-side is that it gives you a defined stop and good odds at a win. The down-side is sometimes the stock doesn’t hit your level and you miss the trade.
Looking through charts this weekend really brought home the new “correlation 1″ meme constantly written about these days in the finacial blogosphere. Patterns look very similar across the board. Here is the most common one we can find:
V type moves like #1 often retrace and have high failure rates. Moves from more based/rounded bottoms like #2 have much higher break-out success rates. $XME right now (#3) is very V-sh/extended, stalled near 60 resistance. Any basing (handle for the V at least) would be bullish and set this up long. However that being said the momentum is so strong right now that nothing would surprise us but at these levels we’d rather buy the pull-back than new strength.
We’ve entered a very forgiving bullish tape — Euro bailout rumors were everwhere for the October rally and yet when news came out on Thursday, it was bought. $AAPL missed. $AMZN missed. $GMCR and $NFLX massacred. Yet no one cares. Bulls are in control and it’s their game to lose.
We’re extended and for us the most bullish scenario would be just to hold the line/or even pull-back but not any further rippage, at least early in the week. And in the unlikely event the bears really start to push then the big gap to fill of course is $SPY 124.5 as the first signiciant support on daily.