I picked these two BIDU trades, from Monday, April 11 at 9:35amET and 2:21pmET as "Plays of the Week" because we had some really great readable and profitable news momentum on this one. These are trades we went over live in the MTrader chatroom showing charts. The second one we also tweeted as it was setting up.
For this trade I used four separate charts with four different time frames. The indicators on each chart are identical, as as described in The Cat System: 5 MA, 15 MA, %K (P=14), %D (P=14) and OBV . In addition, each chart includes a 50 MA, 200 MA and Pivots, which act as support and resistance levels and help structure my trade set-ups. If you are familiar with Gimmie's Trade Set-ups, the first trade was a #3 Set-up and the later trade was a #6 Set-up.
9:35am Trade BIDU +1.84
1. The Trend.
We had a situation where the stock was up a lot and we were expecting a counter-reactive pullback at open. I tweeted my game plan premarket:
Twitter Post: BIDU gapping to new 2011 highs on chinese reports of facebook collaboration. Lookin for pullback at open, long off bottom. Dont be a salmon5 hours ago
If you have looked at my Common Early Patterns list, I I have some info about gaps. When we see large positive gaps, and the market climbs from open, the first climb is usually pretty small. The large gap, plus any early buying, creates a lot of incentive for early profit taking and shorts, so the first climb in that case will usually be more of a short-lived pop. So even if the market or stock climbs from open after a large positive gap, I would not go long until I saw a decent pullback. BIDU climbed about a dollar at open but we didn't go long for that reason.
At the same time you have to be very careful with shorts until you see actual weakening. That is why I said don't be a salmon. Stay with the trend until you have evidence that the trend is turning. Its really important to not only have a plan/expectations, but to then see confirmation.
With these patterns in mind, we look at the charts.
We see %D well above 80 at open. With large positive gap trades, the first move down you often won't see a full 1 min top signal. The %D is often just hanging out around the top like it was this morning. The 5MA (green line) however, is a good clue to more substantial weakening that will give you a better move down. For a positive gap trade, its usually vertical and heading up. Once that 5ma rolls over, that iis when you usually get a better move down. So when its vertical and hitting near top, I'm keeping a very close eye on whats happening in the 120 tick, to trigger an entry and catch that 1 min 5MA turn.
2. The Setup
As the 1 min 5MA was hitting top, I look to the 120 tick to pin-point an entry.
As I said this morning, we don't want to be a salmon. We want more "confirmation" of weakening, so we wait for a break below the 120 tick 50MA to break down once we see the 1 min chart 5MA turning. We want to wait for one candle clearance, below that 50MA too, just to be safe.
The target was the 1min chart "MA Test", the point where the 5MA(green) tested the 15MA(red). As it reaches that test, that is very often the end of that downdraft. BIDU this morning was a perfect example of that. Entry was 147.70 and exit was 145.86.
2:21pm Trade BIDU +2.23
Twitter Post: Daytrade: Caught some nice early shorts & turned around long. Up in top territory now though, retesting 148. On guard for weakening/short.42 minutes ago
This was what we call a Trend Reversal Setup. When the 3min chart 5MA crosses below the 15MA, and simultaneously we get a break below the 1min chart 50MA. Again we want a candle clearance, just to be safe. This is a really predictable setup. I have to be honest though in saying that the news was a gift.
"BIDU Baidu.com sinks on volume; pullback attributed to headlines suggesting Facebook hasn't signed a deal on China"
We were in the right place at the right time. It pays to focus! Entry was 147.43 and exit was 145.20.
Twitter Post: Our BIDU short is going nuts.. dropped 2 bucks suddenly. Looks like news. Trail a stop. Dont get greedy. Im trapping in profits.33 minutes ago