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Trading Setups (Part 5)

07/04/2008 12:00 am EST


Toni Hansen

President & CEO,

Avalanche Setup Example: GROW Daily Avalanche

Pros on Daily GROW Avalanche:

  • 1. The pace of the selling at the start of the New Year was significantly stronger than the move into December's highs.
  • 2. The move into December's highs was made with higher highs that each broke by a lesser degree than the previous one, creating a rounded appearance that indicates weakening momentum.
  • 3. The drop off December's highs took GROW right into the 40-day simple moving average support.
  • 4. GROW hugged the 40-day sma along the highs of the moving average for approximately twice as long as it took for the stock to move lower into that support level.
  • 5. GROW broke lower at the same time as the 10 period sma began to cross under the 40-day sma and the 20-day sma had begun to turn over.
  • 6. Volume increased strongly into the 40-day sma, showing panic, but then declined dramatically as it hugged the support, indicating a lack of buyers despite the correction at the support.
  • 7. There was no immediate support level once the 40-day sma broke that would hinder further selling.
  • 8. GROW had a narrow trading range along support, allowing for a small stop compared to the potential based upon the expectation of an equal move on the breakdown as compared to the drop at the start of the year.
  • 9. The pace at the start of the breakdown was strong and volume picked up as the support broke. These confirmed the move and allowed the stock to put in an equal move on the breakdown as compared to the initial drop into January.

Cons on Daily GROW Avalanche:

The drop at the start of the year was even stronger than the typical strong move in the stock. This can lead to a base that is more than twice as long as the drop into the support, so that a setup that occurs within the usual time frame for an Avalanche development (1.5-2 times as long as the drop) can be false and followed by another pop before it follows through. It can also mean a 2B has a higher chance of forming if the Avalanche attempts to trigger within that time span. This risk applies to securities in which the drop off the highs is at the very extreme levels in terms of the momentum involved.

By Toni Hansen

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