I have been asked about setups I play lately so I started a post about some basic setups I look for. I will try to add to the post as I find charts for them as I don’t have enough time to go through charts looking for specific patterns…
First of all, what makes a good setup? A good setup is simple so that many people are looking for them and acting on them when needed. There is nothing magical about an ascending triangle or a head and shoulder, those are simple setups that many people are looking for. This is the essence of technical analysis. Just as important, a good setup are black and white in terms of being right or wrong. A mistake many traders make is entering trades that allow for shades of grey, which allows for subjectivity and emotions.
As you can see, I don’t use fancy indicators or techniques. The few ones I use are Fibonacci’s, pivot, 5 and 20-day moving average (not period), and sometimes CCI. Price and volume are by far the most important as well as the line drawing tool you use to draw support and resistance 
Finally, all setups work on all timeframe and vice-versa (if you invert chart)
Rejection at resistance:
There is two ways of playing this when the stock is approaching a key resistance. You need to visualize both the rejection and the potential breakout. Playing the rejection here makes sense because the stock was rejected multiple times at this level. The risk is clearly defined: if the price breaks above $31 decisively, you are wrong. The risk reward is at least 5-to-1 which is a must play.
Double Bottom:
Another superb setup and the target was hit almost to the tick.
Descending Triangle:
This chart was a very obvious play if you were watching it. An unfilled gap with a descending triangle and a clearly defined base. Very clean play.
Ascending Triangle:
I don’t think I need to explain, it is one of the most basic play in technical trading.
Breakout above multi-period resistance:
Very simple setup as long as you are watching the stock in question. There is no need to hurry into buying if you miss a good entry just above resistance. Many times, the stock will come and test the previous resistance to see whether it has become support. Stop would be right below resistance.
Trend Days:
I love trend days and you should learn to love them as well! I usually make most of my money on trend days simply because it is such a simple play as long as you detect them early. Every single time the broad market has a trend day, I never miss an occasion to repeat the same things over and over again. It may sound preachy but I always have a hard time believing that some traders had a “bad day” on the chat when trend days should be your ATM machine.
What are things to look out for a potential trend day?
- First thing always is a significant gap outside the previous day’s range on a broad index like SPY. I would define significant as in around 1% or greater
- Weak or no attempt to fade that gap
- We reach R1 or S1 very early in the day
- TICK readings and A/D are one-sided, that is either consistently positive or negative
- Volume confirms price action
- Vast majority of broad market sectors are doing the same thing
Thursday, July 2nd was another case of a broad market trend day. Below are charts of IYR, possibly the weakest sector that day. How do you play a trend day? You identify it as early as possible in the day and hop on by trading various indexes. Trend days usually finish at or near the extreme of the day which makes it easy to exit if you don’t get stopped out in the midday fakeout/chop which you shouldn’t. I wouldn’t recommend tweaking with position sizes if you aren’t very experienced with identifying trend days but once you do, you will realize you want to make as much money as possible on those days.
July 15, 2009: A very strong trending day
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