If you are familiar with anything I've written, you're aware that I key off patterns. Price action is the market putting its money
where its mouth is. In this Trading Lesson, I'm going to walk through a recent setup, Citrix Systems (CTXS), that I
focused on in my morning commentary for TradingMarkets.com on Jan. 13 and Jan. 18. In fleshing out how I picked the setup and, just as importantly, how to surf the
resulting move, I hope to let you get into my head.
I'm not really a position player. Long term for me is three days -- maybe
three hours. I seek to capitalize on stock movement as I see
momentum ebb and flow. I may be in and out of a stock a few times
the same day. That doesn't mean that's the correct way for you to
trade, that's just my style. It probably comes from being
indoctrinated to the market at a time when the market believed
redwoods didn't grow up to the sky -- a time before anything more
than three-month bear markets were outlawed.
I'm
going to approach this article in a kind of rapid-fire,
stream-of-consciousness way, much as I would when scrolling
quickly through daily charts after the close, looking for the
next day's setups. I'm going to walk through the CTXS example
showing the way I make trading decisions when looking at intraday
patterns. Short-term traders don't have the luxury of examining a
lot of criteria. There is no air-tight analysis. They must shoot
from the hip, react quickly to what they see, and pull the
trigger or be stampeded by a new breed of point-and-click
gunslingers. There's plenty of time to think about the trade
later. That's where the learning becomes indelible. I urge you to
review intraday charts and print out solid learning examples for
posterity.
Let's
take a look at CTXS.
In my
commentary on Jan. 13, I mentioned
that CTXS, a leading stock in a complex pullback, looked like an
interesting buy candidate. Following is the weight of evidence
leading to the decision and how I read the tale of the tape.
Observation 1: Jan 7. Strong
reversal after gap down open tests important 50-day moving
average. (1).
Observation 2: Strong close,
nearly at the top tick, leaves what I call a "stickman"
double bottom with the tail day of Dec. 15 (2). Nice way to close
out the week. Looks like a potential offset to a climax as the
large range up looks to counterbalance the large range down day
of Jan. 6. Stock is poised for continuation on Monday.
Observation 3: CTXS gaps up
nearly 5 points to 118, leaving no early entry. That really
ticked me off. The follow through was impressive as the stock
closed over 124. Something good may be brewing. (3).
Observation 4: I'm going to
zero in on the behavior of the first multiday pullback after this
momentum. This will help me judge whether the stock looks like a
mere two- to three-day snap back or whether smart buyers are
accumulating. Are they going to boom this leader to new highs
into expiration. No doubt the January 120 calls were cheap as
CTXS tagged par! I'm stalking for signs that the
"rally" is impulsive, i.e., meaning a new leg is coming
and the reaction is over. What I want to see is more rally than
decline in both time and price.
Observation 5: CTXS has a
two-period pullback which accomplishes the bullish objectives.
The stock tags the high at the low bar day while at the same time
falling a gap.(5).
Observation 6: This
leaves the stock in a "first" 180 position since low as
CTXS closed above its 10-day MA. (P.S. I don't ascribe an meaning
to the idea that gaps need to be filled, but since many traders
and technicians do, I do watch for behavior at gaps. On Wall
Street, perception is everything. Reality gets second shrift.
Observation 7: Now CTXS
is in the do-or-die position. When CTXS gaps open over 3 points
on Jan. 13 (to 124), it looks like all engines are go. It appears
poised to challenge prior highs up at 130. However, CTXS fails to
maintain traction and closes below the open. This washes out many
momentum players including myself. I never take them home if
they're against me. Yet, I realize the jury is still out as CTXS
may have closed poorly but it was still up on the day. The nature
of trends is for stocks to thrust, pause, and pivot back in the
direction of the emerging and mature trends. However, it is also
the prerogative of stocks to be fickle; it is the nature of the
markets not to accommodate -- at least not with immediate
gratification. This is the short-term trader's conundrum!
Stocks often stutter, stop and head fake before continuation
prevails. Hey, Magic Johnson could fake one way and head the
other in a fast break. As you've heard me say before. the second
push often offers the better move.
Observation 8: On Friday Jan.
14, the die appears to be cast. CTXS fails to follow through to
the downside after Thursday's poor close. Still, I'm wary of
another false pop up on the open that could quickly fade. But
when CTXS gets through the first hour unscathed and forms a tight
band of consolidation, I'm thinking false moves lead to fast
moves (the false move being Jan. 13) ("A" on intraday
chart). I am starting to think trend day. I see that if CTXS can
break out over what appears to be a double head-and-shoulder it
could easily be a big trend day. If CTXS can close at a
new high, it may indicate a multiday expansion in range. This is
what I call a Magee Squeeze (after technicians Edwards &
Magee who came up with the head-and-shoulder pattern). Right
shoulders that are broken cook those who short against them. Fast
movers come from false patterns. It's what some technicians refer
to as "The Hound of the Baskervilles." In the novel,
Sherlock Holmes solves a murder when he realized it was an
insider job as the hounds didn't bark when the crime was
committed. CTXS was beginning to look like an inside job -- a
flush out to par pulls the rubber band back significantly to
catapult the stock to new highs into options expiration.
Observation 9: As CTXS
flatlines, hugging old highs from 10:30 to 12:30 on the morning
of Jan. 14, it suggested compression was mounting for an attack
to new highs if they come back from lunch in New York and take
out the triple intraday tops the stock should explode. Bingo. A
run to 136 before profit-taking sets in. Notice that although
CTXS does close at a new high, a second late-day violent selloff
("B" on intraday chart) leaves the stock in a 1-2-3-4
pullback on the 10 minute chart but bullishly keeps some sold-out
bulls at bay. This is not unusual going into a weekend,
especially a long weekend. But the stock is now in a strong
position and set up for all those traders and fund managers
scouring their charts over the weekend. The rubber band is pulled
back short term (intraday) as the stock closes with an expansion
breakout buy signal. A great weekly close that will show up on
the new high list.
Observation 10: This is why I
showed CTXS again on my Monday morning commentary (Jan. 18). The Futures
open soft. Thank God. CTXS won't gap open 5 points. The stock
opens flat and is very resistant to the market pullback giving up
only a few points and showing superior intraday relative
strength. As you can see from the intraday chart, the breakout
resumes quickly. ("C" on the intraday chart.) Such is
the power of first intraday pullbacks on the heels of explosions
over high level consolidations.
The explosion occurs in three wide-range 10-minute bars. Once it's
over, it's all over but the screaming and shouting. The whole day
basically occurs in the first half-hour. This is why it is crucial
to be prepared and do your homework. The market won't take any
excuses that one of these Hounds of the Baskervilles ate your
homework!
Note
that when a late-day breakout on Jan 18 ("D" on the
intraday chart) failed, CTXS nose-dived when it took out the
morning high to the downside (intraday Turtle Soup!). After a
first retracement ("E"), CTXS waterfalls when it
violates the pullback low ("F").
Conclusion: Markets turn on
a dime. Most traders cannot. Therein lies your profit. As I
remember reading somewhere once, "Any fool can believe the
obvious; it takes a genius to believe a palpable lie."
