Channel Trade Win

WY LONG
When I sit down to do my weekend homework, I generally start with the broader market. I try to anticipate what the market may do over the next two to three days — and then try to find a pick in that direction. If the market gives me a mixed message, as it did last week, then I generally select a stock on its own merits.

Last week, I expected the market to test the upper band of its recent range. I went looking for a stock that showed some strength during the pullback of the preceding two weeks.

FIGURE 1: GRAB ME AND TAKE ME. WY broke out on big volume and was pulling back to its breakout line on low volume. It held above that line on closing basis. The 78-minute chart showed the stock digesting its gains after a runup. It was in a bottoming process with a squeeze forming.

FIGURE 2: ENTRY POINT. The entry point was above 42.2, which was a resistance level on a 78-minute chart. The stop was below the consolidation level on a 15-minute chart and the target was the area of recent highs.

On Monday morning, WY gapped up, and so I waited for a pullback and some subsequent strength to enter it. That pullback turned to be sharp and scary, but it never violated my stop. In the afternoon it rallied, and I took the position home (Figure 3). On Tuesday, it was up 13% premarket on some news. I sold most of my position in premarket, leaving just a bit to ride it further. But after WY opened, it showed no strength, and so I sold the remaining shares. It turned out to be a good move because WY continued to sag and actually filled the entire gap in the next three days.

FIGURE 3: THE EXIT. The following day, WY was up 13% premarket on some news. The trader sold most of his position in premarket, leaving just a bit to ride it further. But after WY opened it showed no strength, and so he sold the remaining shares.

Figure 4 shows several pullbacks to value, followed by rallies into the overvalued zone. If you look closer, you can find a few more that haven’t been marked. Try to find several stocks that move in this way, and you’ll have a pool of potential trading vehicles.

FIGURE 4: TRADE REVIEW. Here you can see that there were several pullbacks to value, followed by rallies into an overvalued zone. If you look closer, you can find a few more that haven't been marked. Try to find several stocks that move in this way, and you'll have a pool of potential trading vehicles.

Sid bought and sold just in time. Had he waited just a day, his profit would have shrunk. If a channel trading reminds you of a cash machine, keep in mind that the machine in question has only short hours of operation. You have to be alert and near the screen to take full advantage of such trades, which is exactly what Sid did!