Before I even get close to organizing my list of setups for next week, I can tell you that the first textbook trading idea that jumps off of my screen is $MS. In addition to the $XLF closing the week at a key support level, $BAC has also given up many of its recent gains, as it was down eight consecutive days before managing a green close on Friday. When I look at former CEO John Mack’s (“Mack the Knife” as he is known) firm, Morgan Stanley, I see a classic gap fill situation.
As you can see on the daily chart below, the stock broke out on heavy volume back on July 21st, and has since seen a slew of red closes on tame volume to bring it back to its breakout point, which by the way happens to coincide with the now flattening out 50 day moving average. From a trading perspective, your setup is to go long right here, right now, with a tight stop loss below $25 or so. You are looking for this key breakout point to hold, and for the stock to make another important higher low.
Why do I think this is a high probability? To begin with, the initial breakout on 07/21 was on very heavy buying volume, illustrating the conviction of the bulls. Moreover, ever since that breakout, there has been no menacing selling volume, indicating that the original buyers have staying power in the name, as they believe the stock can go higher still. In addition, the stock has now been down for over a week on consecutive days, setting it up for a mean reversion play. This perfectly coincides with the stock having perfectly retraced its breakout, as well as retesting the 50 day moving average.
It is your money and your decision, but I will be looking at $MS first thing on Monday morning.
i really like the potential here. i see where 25 coincides with the origianl inverse h&s breakout! i think i will move this to the top of my to do list monday.
Thanks C&W. One newb question though; if this stock goes below 25 b/c the market drops, does that mean the stock won’t rebound at a lower level, or is it that once the support is breached, regardless of the market, it will then find a new low? Sorry if this is elementary – still learning.
It is not so much a case of saying it will NEVER rebound. I am merely trying to identify my risk in this given trade.
Chess — again very insightful. Especially since I vaguely remember singing the song in a karaoke bar on the Ginza about a thousand years ago when I was establishing my biz in Japan. I was a freaking hit in Edoya.
LOL good stuff
Really enjoy your blog. Do you have any recommended reading to better inderstand chart patterns with candle stick charts?