Studying the Rounded Reversal Breakdown Setup in Ford
Wed, Jul 26, 10:51 AM ET, by Corey Rosenbloom
Ford (F) gives us plenty of educational examples of how a market sets up a trend reversal and the stages price goes through ahead of these excellent opportunities, especially for swing and even intraday traders.
Let’s take a moment to study this perfect progression for our educational resources:
Before we step inside this chart, take a look at this morning’s post on Ford’s Bear Flag.
Pay close attention to the rally UP into the falling 200 day SMA which was near the $11.85 level.
Here’s the main point – price (in a downtrend) rallies UP toward a critical resistance target on a HIGHER timeframe.
That’s sufficient for a short-sale set-up and trade – nothing else needs mentioning.
However, if you want extra confirmation or are nervous about taking a trade, you can always step into a LOWER time frame to see what’s happening there.
As it turns out, Ford was forming a perfect reversal set-up on the lower frame – seen here in the 30-min chart – at the same time it triggered a bearish short-sale into resistance trade on the Daily (higher) frame.
Here’s the progression as exemplified by Ford on the lower frame:
1. We typically see a lengthy NEGATIVE MOMENTUM DIVERGENCE ahead of a short-term reversal in price. That was the case here From July 12th to the peak on July 19.
2. Price BROKE A RISING TRENDLINE and then broke under the 20 and 50 Moving Averages
For many traders, that’s sufficient for an ENTRY into a reversal trade (on the breakout)
If so, the stop-loss goes a few points above the high and ideally beyond a “Round Number” level – in this case it was $12.00 per share.
A reversal targets the prior low or beyond, which is the $11.00 per share area here.
As the trade progresses, we see additional information that price is likely to trade lower such as
3. A KICK-OFF or new momentum low when price is NOT making a new low. We also saw a bearish spike in volume on July 20th. This is similar to Richard Wyckoff’s “Sign of Weakness” that precedes trend reversals. Finally we see a
4. CONFIRMATION or a new momentum low with surge in bearish/sell volume as price IS making a new swing low. Odds favor continuation in the newly emerging trend direction when momentum and volume confirm price.
Finally we do see the gap and bearish movement down toward our target, giving opportunities (to short-sell only) for intraday traders and of course swing traders on the price pathway lower.
This is a good example of integrating a HIGHER TIMEFRAME SELL SIGNAL with a LOWER TIMEFRAME trend reversal model.
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Corey Rosenbloom, CMT
Afraid to Trade.com
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Corey's book The Complete Trading Course (Wiley Finance) is now available along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).”
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