There is a famous saying about trading the markets;
“I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up.”
I always thought that it was first said by Jim Rodgers in Market Wizards, but someone told me the other day that it was actually Jesse Livermore who said it (or a version of it) first.
I really don’t care who said it, so for the purposes of this post let’s just say it was Joey Heatherton who said it after a two-week sold out run at The Sands.
It’s a good saying, but it’s a little deceptive. Nothing in the market is that easy. Even if you see the money sitting there and you go to pick it up, how do you know that it’s not booby-trapped with a napalm grenade, ready to blow your face off and send you writhing away in agony like some flaming blob of melting flesh?
And don’t forget, it’s in the corner. What happens if you are not paying attention and turn around with your spoils only to be confronted by an angry bear or bull move? Where you gonna go? What you gonna do? You done dropped your pistol when ya busted the window!
The convoluted non sequitur point I am making here is that if you want to “pick up money,” in addition to being patient, you have to work out all the angles, know the risks, know how you will minimize them, and what your escape plan is if things go bad. And that is done by taking a “script” for a setup and making it meet certain criteria before you trade it.
My script for today is that both $AAPL and $SPY are possibly ready to buy for a reversal trade. Here is the criteria I will use.
1. Extended downtrend – Both $AAPL and $SPY are in downtrends, though $AAPL’s is a longer term one and $SPY’s is only intermediate. Both however are below major moving averages. Check!
2. Oversold – You can see by the fact that both $AAPL and $SPY are below their Bollinger Bands on a daily basis. Check!
3. Coming into support – You can see these areas ($385.00-ish on $AAPL and $154.00-ish on $SPY) indicated by the horizontal support lines. Check!
4. Gap down open – You want a large, ugly, bloody gap down. And if the $AAPL and $SPY streams feel panicky, even better. TBD!
5. Volume – You want to see a large volume spike on a 5-min chart near these support zones, indicating short-term capitulation of bulls. TBD!
6. Reversal signal – You want to see a reversal bar or pattern on a 5-min chart in conjunction with the volume spike and in the support zone. This bar or pattern will determine your risk/reward and if the setup is worth taking. If so, you buy the break of the high of the bar (or pattern) and put a stop below the low of the bar (or pattern). TBD!
Once in the trade, if not stopped out, it can be managed in a number of different ways……
Stupid – Hold the whole position into the close.
Reasonable – Sell half into the close and hold one half overnight on a strong close.
Smart– Sell a quarter on the first move up, another quarter into the close, and hold half overnight on a strong close.
A flat open or a slight gap down will lessen the chances that this trade will work if the set up presents itself. A gap up automatically voids this trade no matter what sets up later.
And of course, if your stop is hit, the trade is automatically cancelled, i.e. don’t get yourself backed into a corner, no matter how much money you think is “just laying there.”
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