What IS the opportunity?

There are times where I look at a chart and can see a potential for opportunity with a variety of trading approaches. Today I find myself starting at the chart of MFLX (Multi-Fineline Electronics) after a nice Gap up move:

In reviewing the chart, several things stand out to me:

1) The RSI is in Over Bought territory above the 70 level.

2) Price has produced a Gap that will eventually get filled

3) Volume is massive on this Gap up move

4) Profit taking could potentially turn this Daily candle in to a Shooting * – a Trend Reversal signal

With that in mind, and no current position, what is the highest probability setup that you see?

 

8 thoughts on “What IS the opportunity?

  1. Hello Derald,

    Thank You for the great posts on twitter and blog.

    I would think there would be a pullback on the stock with such as gap up

    I have been studying “quality” stocks that have gapped down and trying to see if any patterns are obvious. What I have notice that some stocks make up some of the loss. What hurts is the trading costs, since at times stock only making up maybe from $.25 to a $1 a share. trying to learn how to trade these patterns and make money. 🙂

    Thank You
    Ron

  2. One of the key things that I have found in the Gap up or down plays is that you have to really understand where the KEY support levels reside – know where folks are going to put some “stakes in the ground”. I have found the use of Put sales to be my primary weapon of choice for several reasons – including one that I am paid to miss the bottom, don’t have to be spot on just in the vicinity.
    For the retracement that you speak of, I use Fibonacci levels to gauge targets for those that will be Knife Catching, Dip Buying, Bottom Fishing – whatever you want to call it. And yes, it needs to have a good Risk / Reward to make it worthwhile. Hard to get excited with .25c indeed.

  3. Derald –

    Okay $MFLX gap up is interesting. If I look at the May 2011 breakdown this new gap up has filled it after 9 months. I like to see how the next day will look like. Will the price action and volume continue or will it retrace back to the recent high from Oct/Nov.

    Regards

    Noman

  4. Hi Derald

    Thank You for answering my questions.

    Educational Study:
    I was watching $WSM yesterday and it didnt want to go below $34 a share. So I didnt buy. I will look at it today and if breaks 34. I will wait to see if it finds support.

    Can you explain on how you use the Put Sales to establish the vicinity of the bottom?

    Thank You
    ROn

  5. The concept behind the Put sale is to accompolish several things. Since there is no way to truly know where the bottom is to perfection, you need some wiggle room in trying to find a floor in price. With the Put sale, you take in premium which is to help offset any further decline in price that may occur. Another approach is just to plan on scaling in with a buy, say 1/3 equity at a time.
    There are times where I do a hybrid play that I call my Franks & Beans play. To make the “full meal” of a trade, I sell a 1/2 pos of Puts (the beans) and buy a 1/2 pos of stock (the franks). The premium that I take in helps offset any further decline in the equity that I buy. I did this with ORCL in December.
    This approach does take a good sense for knowing where people are putting their “stakes in the ground” with price – that takes some work & focus to figure out.
    One more note here. I do pairs trades frequently and will utilize them when I see 2 stocks that are polar opposite at the moment (like the L URBN S CROX trade I have on). The mean reversion opportunity can also help alleviate missing a true bottom.

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