Many readers are familiar with my Hit and Run books, which explain my short-term trading methodology. Most traders are surprised to find that despite my focus on the short-term (a few hours to a few days) time frame, I spend a substantial amount of time analyzing the big picture. In my experience, explosive stock moves usually don't occur out of the blue; often (not always) there are clues out there that will tip us off to stalk a situation. Some of these clues can be found in the study of price patterns, time patterns, or cyclical analysis, volume studies, identification of price octaves on the Gann Square of Nine chart, identification of time/price 'square outs' on the Gann Square of Nine chart as well as Trend Line theory.
Volatility studies can also offer clues as to the likelihood of an imminent explosion in price. Sometimes, of course, without some knowledge of the above correct underlying structure of a stock price movement, the best volatility studies won't give you a clue to the directional bias of a volatility setup. And of course, as our mama's told us, "…it's important to try to get on the train before it leaves the station." As one of my heroes, legendary trader Bernard Baruch said, "Successful speculation is about anticipating the anticipators."
As W.D. Gann used to say, "Use all tools, all the time." Of course, if you don't know how to put the technical pieces together and 'dovetail a joint,' the more tools you use will simply overwhelm you. For the purpose of identifying the explosive setup below on DOX and how it tipped its hand, we are going to focus on how drilling down from the big picture to the short term picture and how using a few simple tools led to a solid one day profit of 10%. If you do that enough times the magic of compounding will make you richer than you ever dreamed possible.
As I alluded to above, one of the keys to identifying larger than average moves is not just correct interpretation of short-term price behavior, but also the message of the big picture. In other words, the short term doesn't exist in a vacuum; it emanates from the vibrations created and set in place and determined by big picture forces. Imagine yourself sitting on the edge of a perfectly placid lake with your feet in the water. A small plane flies overhead, from which a boulder is thrown into the middle of the lake. Ten minutes later, ripples hit your ankles. The initial force was set in motion and the outcome was clear. But it took time to occur.
Unfortunately in the markets, there are always two vibrations or two trends at work simultaneously, the major and the minor trend. Much like a major and minor chord in music, the tug of war between these two trends determines what kind of slope will dominate as the stock marches across the chart. As in music, in the markets you must grasp a sense of the whole piece before any one note rings true. Only a sense of the whole piece will reveal the underlying tone and rhythm of a movement whether on Wall Street or Lincoln Center. As traders, we play note by note but only in the context of a larger framework can satisfaction be maintained.
The encouraging part is that, as in music, there are refrains and patterns that repeat. There is often - not always - symmetry in the markets and the expectations that this repetition of behavior set up. Let's take a look at an example of drilling down from the big picture to the short-term picture.
On June 14th (a), DOX gapped to the downside confirming a test failure at a top and in the process leaving a breakaway gap from a triangle. The breakdown gives us a point as which to draw a downside channel.
In my experience, many times the first violent reaction is the midpoint of a move. If you take the high price in June of 66.50 and the low price of 24 on October 3rd, you are given a range of 42.50 points. One-half of that range is 21.25 points. Subtracted from the high of 66.50, you have a midpoint of 45.25. A look at the chart at 45.25 shows the expansion in volatility that marks the midpoint of the ultimate decline (d). Of course, there is no way at that point to ascertain what the low in fact will be. However, assuming that 45 may be a midpoint, one can arrive at a projected low point. As Gann said many times, "…as above, so below." Just as there was a test of the high in June that led to a break of a triangle; likewise, subsequent to the October 3rd low at 24, there was a successful test on October 31st ((a) chart below).
It is important to note two elements at this point in the chart; 1) from the high on June 5th to the low on October 3rd was almost 120 calendar days, one-third of the year and an important inflection point in Gann analysis to look for a potential turning point. It is this price projection and the time count that put DOX on the radar. 2) Importantly, the test on October 31st occurs after DOX breaks above the down trending parallel channel On October 11th (see Figure 1).
On November 15th, DOX generates multiple buy signals. Not only does the stock break above the triangle, but it also leaves an Expansion Pivot buy signal (b) as it closes over the 50ma for the first time since the breakaway gap to the downside in June. As you know, multiple signals tend to generate better risk to reward setups and many times generate explosive moves.
Despite the fact that the overall indices, led by the December S&P futures made a first hour high on Friday November 16th and trended mostly lower for the balance of the morning session, DOX continued to advance. After a first pullback in sympathy with the futures into 11:30a ((a) chart below) DOX exhibited strong intraday relative strength, or right translation, when the stock followed through, shrugging off the market, to make a new intraday high. This set up a solid trend day as DOX continued to stair-step up into the bell leading to solid profits.
In conclusion, as you can see, the explosive move in DOX didn't come out of the blue. Putting the pieces together -- stalking the prey and leaping as the daily charts triggered, then pressing as the observation of intraday relative strength suggested a trend day -- made for a successful trade. But if the stock isn't on the radar to focus on, how can you expect to observe its superior behavior on the key day, Friday, November 16th? I have found that the creation of a weekly Hit List as well as a Stalking List of big picture setups is the only way to focus and drill down.
In trading, focus is paramount. The more you try to see, often the less you see. The nightly research we do of quickly scanning manually through hundreds of charts allows me to create both lists. This is where the candidates for both the Cooper Swing Report and the Cooper Hit and Run Day Trading Report are generated. There are things that can be seen in scrolling through many charts every day manually that cannot show up on routine computer pattern scans. As I like to say, speculation is observation.
