KIDLAT CHRONICLES
Vol. 2 | May 8, 2016
“THREE DAYS TO KILL” Classic Bounce Plays usually have a 3-day timeframe. It’s always a “get in, hold, and get out strategy” for Days 1, 2 and 3 respectively. Of course there are variations as far as timeframe is concerned (e.g 2-day, 4day, 5-day bounce plays, etc), but for this issue I’ll just focus on the classic 3-day bounce. The precursors or what happens before the bounce won’t be discussed here. Figure 1 shows a classic 3-day bounce play on $IMP. I’ll make this stock as my canvass for this discussion.
Figure 1: April 27 – 29, 2016: 3-day Bounce of $IMP from 11.60 to 27.90.
DAY 1 - SUPPORT HIT The “Buy Day”. This is usually the day when price hits a particular support. It’s the lowest candle of the bounce. Every falling stock has to reach a temporary support at some point. What we want is to be there when that happens. The more established the support is, the better. This support could be a previous Darvas Box, MA, Fibonacci Retracement level or a combination of any of the three.
Figure 2: April 27, 2016. $IMP bounced near 76.4% Fibonacci and 50-MA.
Early set of buyers come in especially the bottom fishers. The perfect setup for this is when the candle shows a sign of reversal like a strong green candle, Doji, Morning Star, Hammer, Bullish engulfing, Bullish Abandoned Baby, etc (ask Google for more bullish reversal candlestick patterns). Buying on EOD If you want a defensive approach you can opt to buy on EOD (End-of-day). Traders live under the impression that the ONLY buying window in bounce plays is at the lowest price (or near it) of Day 1. And if they fail to get shares within this window, they’ll just don’t enter the trade at all even if the setup is still intact thinking that they’re already too late for a picture-perfect entry. You don’t always need to buy at the lowest of the lows. Sometimes, it’s best to wait for a clear sign of reversal first before entering bounce plays. Besides, remember that this is only Day 1. If the stock will continue to ascend til Day 3 you still have a lot of room for upside. So technically you’re still buying at the lows. The only thing that you need to ensure during this day is to get shares! DAY 2 - MOMENTUM CONTINUATION This is the “Acceleration Phase”. First day was such a success that momentum continues in Day 2. Price rallies as new set of buyers join the fun. Buyers out-number the sellers. Those who were able to buy on Day 1 won’t usually sell on Day 2 to avoid selling prematurely. However, entries in Day 2 are somehow LATE already. So be extra careful. There are bounce plays that end in Day 2. Just manage your expectations and look closely for possible resistance hits. Monitor your trade by the minute. Treat it as your consequence for failing to buy on Day 1.
Figure 2: April 28, 2016. $IMP accelerated on Day 2 closing at +49.8%.
Confirmation Day Day 2 is also critical as it confirms the bounce signal that occured in Day 1. For perfect setups, it should close above the HIGH and the CLOSE of Day 1. The LOW of this candle should also be higher than the previous day’s LOW creating a Higher Low. And ideally should close at the top 25% of the candle’s range (strong close).
DAY 3 - RESISTANCE HIT Day 3 is usually the “Sell Day”. Buying on Day 3 is a SUPER LATE entry as traders who entered in Days 1 and 2 are already taking profits. This is also the day when price hits an important resistance. It could be a previous Darvas box, MA, Fibonacci retracement level, or a combination of any of the three.
Figure 3: April 29, 2016. $IMP closed at -17.4% after hitting resistance at 38.2% of Reverse Fibo.
TRADING $IMP Let’s look at how I traded this 3-day bounce on $IMP. Below is a story of three different trades in three different ports in one major bounce play setup. Since this is fast moving stock I used the 3-minute chart to properly time my trades. And used basic Darvas box principles for my entry and exit strategies. This is what $IMP looks like in the 3-minute chart from Day 1 to Day 3 of the bounce:
Figure 4: April 27 - 29, 2016. 3-minute chart of $IMP with plotted Darvas Boxes and 100-MA.
TRADE #1: BOUNCE PLAY
April 27 - 29, 2016. 2 trading days hold with +94.32% gain.
This trade was from Day 1 to Day 3 of the bounce.
1. I needed to see some sign of strength first before I considered trading this notorious stock. This was the HIGH of the previous day (April 26) valued at 14.02. I made this as my trigger. 2. Price broke out from previous day’s HIGH and reached 15.00 [+22.95%]. My objective was to catch it on retracement. 3. I used Fibo to find a good support (check Figure 5). Price retraced til 14.00 [+14.75%]. BOUGHT at 14.10 in the next few minutes using Port #1. My objective was to ride the bounce til Day 3 as much as possible. Tight cut loss point was set below 14.00. 4. SOLD my position in the first few minutes [9:36 AM] of Day 3 (Apr 29) at 27.70 with +94.32% profit. There were two main reasons why I sold at this price. First, the previous candle was a ceiling. Ceiling play dictates that massive selldown is expected the next day. So better get out in the first few minutes of trading. Secondly, it’s the 3rd day of the bounce and if you look at Figure 3 above, it shows that there is resistance at 25.12 which happens to be the 38.2% level of Reverse Fibo. Any sell above this price was considered a good sell for me.
Figure 5: April 27, 2016. Price found support at 38.2% Fibo in the 3-minute chart.
TRADE #2: INTRADAY MOMENTUM PLAY
April 28, 2016. Intraday hold with 24.74% gain.
This trade was executed intraday of Day 2 of the bounce.
1. Price broke out from previous day’s HIGH indicating that the momentum from previous day is going to continue. 2. Price retraced shortly after breakout to test old resistance as its new support. Plotted new Darvas Box. BOUGHT on breakout at 18.00. Given the fact that this is the Acceleration Day and that this stock can make wonders, I entered using Port #2 to exploit this opportunity. But the trade
objective for this one was to sell ASAP. Momentum might die down any moment turning the supposedly 3-day bounce to a 2-day. 3. Price peaked early in the day [10:24 AM] reaching as high as 22.80 or +41.09% (less than 10% from ceiling!). Strong price actions like this in the morning session indicate that it’s bound to retrace soon. SOLD in the next few minutes at 22.70 with a +24.74% profit.
TRADE #3: CEILING PLAY
April 28 – 29, 2016. 1 trading day hold with +35.64% gain.
This trade was from Day 2 to Day 3 of the bounce as a Ceiling Play.
1. Consolidation at the Highs setup formed in the minute chart. BOUGHT inside the box with an AEP of 20.29 using Port #3. My objective was to ride the momentum as this was already a ceiling candidate at this point. 2. Price peaked at +41.09% early in the morning [10:24 AM]. As soon as I saw this, I knew it’s going to retrace soon. That’s why I quickly 3. Set a trail stop at 19.02. The bottom of this box. 4. Momentum in Day 2 of the bounce was sustained and closed at 24.20 [+49.75%], its ceiling price. 5. SOLD position in the first few minutes [9:33 AM] of the next trading day (April 29) at 27.75 with +35.64% profit. For the same reason why I sold Trade #1.
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