Tuesday, July 8, 2008

Being Careful

I was running some scans this evening after market close and a number of oil related issues came up with what would appear to favorable candlestick patterns...... Hammer type candles bouncing off lower Bollinger Bands. These are tempting for me to trade, especially when they test the 50 day moving average and close above it. However, from experience I have developed a rule that I don't trade these candles when they are occur in the first pullback after a technically divergent top. This means when RSI, MACD, momentum, etc. all have shown bearish divergence and then price goes down and forms one of these candles, you should be careful. I have seen them fake out many times. People may be refusing to see the beginning of a downtrend and they try to bargain hunt around the 50 day moving average. There appears to be a bullish reversal, but then within a couple days there is a break below the 50 day MA and the trend continues down.

So, the risk reward may still even justify a trade on something like KWK or RRC or COG today, but make sure the stop loss is in place below today's low, because that level should not be touched if the trend goes on to make new highs.

Also, the short term model is nearing overbought, so another up day would probably take it there. It would be safer to wait to see if it can become overbought, then pullback to near oversold again at a higher low than the recent one the last couple days. That's what I would look for to recommend a new QLD trade.

Pete

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