I have found that using the longer-term OBV and RS analysis can be one of the best ways to determine whether a correction is a buying opportunity or not. Specifically, I look for the monthly OBV and RS analysis to confirm a major new high, and then develop a strategy to buy on the correction.
Amazon.com (AMZN) is a good case in point. Its correction from the 2007 high of $101.09 had a classic a-b-c pattern, and at the end of January 2009 (line 1), the monthly RS line moved back above its WMA. The relative performance confirmed the 2007 highs.
The monthly OBV formed higher highs in 2007 and 2008 (line c), and had a strong uptrend (line d) from the 2007 lows. The OBV was already back above its WMA as the overall market was bottoming (line 1).
The rally from the lows at $34.68 lasted until April 2010, as AMZN reached a high of $151.09. This was just above the 161.8% target from the 2007 to 2008 correction, which was at $142.62. The 127.2% Fibonacci retracement target at $119.49 was hit 11 months after the lows.
There were several bullish factors heading into these lows that favored having resting buy orders in the market. The monthly OBV and RS had been confirming the price action and had long-term bullish patterns. The weekly analysis also suggested AMZN was correcting, not topping, and the RS line had formed a continuation pattern (line c and d).
The weekly OBV was holding well above its flat WMA in June and was forming higher lows (line f), unlike prices. Typically, I look to buy at just above the 38.2% support, and then try to do additional buying below this support.
For the stop, using one under the 2007 high of $101.09 as well as the psychological support level of $100 was a reasonable approach. Under the 50% support at $92.89 was too wide. Round-number stops are a bad idea, but a stop of $99.28 should have been wide enough to protect against any transitory breaks of the $100 level.
As for the buy level, 0.5% above the 38.2% support at $106.62 would have worked out to be $107.15. As for a second buy area, the mid-point from the high of $101.09 and the 38.2% support at $106.62 would be $103.85. This would work out to an overall risk of 5.9%.
With the upside target, I prefer scaling out of long positions, as it helps reduce the overall risk to the portfolio and can be positive psychologically. Selling just below the prior high of $151.09 would have been a valid approach.
My main target would have been the 127.2% Fibonacci retracement target from the $151.09 high to the $105.66 low, which was at $163.45. Therefore, attempting to sell at 1% to 0.5% below this level, say at $161.80 to $162.60, would have been the plan.
As it turned out, AMZN eventually exceeded the 161.8% Fibonacci retracement target at $179.17, eventually reaching a high of $191.60 in January 2011. (For my current Fibonacci analysis of AMZN, see last week's column.Next: Let's look at Macy's