Take This Simple Test
TRUE OR FALSE: Fibonacci patterns and price zones are only utilized in a
reversal trading strategy?
Remember when you took True/False tests in school? Some of the keys to test
taking if you were not fully prepared for the subject matter were things
like: if a statement is filled with “extreme” language like “never”,
“always”, “only”, etc. Then that statement is typically “False”.
Now, let’s look at my question once again. Of course, Grasshopper, the answer
is FALSE. Today I have a nice set up example on the daily chart of Qlogic
(QLGC) to demonstrate this point:
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I’ve labeled by number the areas to focus on here:
We are in a definitive downtrend, and Qlogic has just reached the upper
band of this down-trending, 2 std deviation, regression channel. This by
itself puts the odds on the side of a downside move developing soon.
Pattern: We have a Bearish Gartley pattern within the context of this down
trend. So here is where my question is answered. The trend is down, and we
have a “micro” pattern that has completed, and nothing to mention that the
pattern has completed at the top of our channel.
Price Zone: I have a confluence of 8 Fibonacci price levels from 43.74 to
45.20. Also note that we printed a gravestone doji candlestick pattern
against our Fibonacci price zone. Another piece of data to chalk up to the
side of a move south.
Broken pattern?: Let’s say price pushes up through 45.20. What has price
just done? It has violated a pattern, a price zone, and a regression
channel. Folks that puts many technical traders that are shorting this
stock in “scramble” mode. These “shorts” will be fuel to an upside momentum
situation since they will be buyers of the stock to cover their short
position, while momentum players will jump on the band wagon to ride the
wave up. If this happens the objective to the upside is around $48.
So, how do you want to play it?
Scenario 1: Play the short
Under this game plan I’m selling QLGC just below Thursday’s low with a stop
just above the Fibonacci price resistance zone.
Scenario 2: Play the broken pattern long trade
Wait for price to violate our bearish parameters and jump on the north bound
train, buying above 45.20 and trailing a stop below the previous day’s low.
This is a momentum trade situation so you should get very little pullback. So
stops should be trailed neatly and tightly (are those words?)
Scenario 3: Play Both
Set up for the short trade in #1. If the stop is hit consider “reversing” the
trade to go long. What starts out as a 1.8 pt loss on the short trade could
develop into an overall gain of over 1 full point. Yes, you could also lose
on both trades. If you can’t handle that possibility then I suggest you go
invest in a turtle farm.
With all my trading passion!
Derrik