SFO_Technical Strategy.pdf
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technical
strategy
volume 1: January 2009-December 2009
anthology of the Sfo magazine monthly column
technical strategy
Play the intraDay weDge
1
by robert t. zukowski, cmt
Picking toPS anD bottomS
3
by rajoo Sharma
high-Probability traDeS
5
by todd krueger
range breakoutS
7
by michael carr
Short-term breakoutS in long-term trenDS
9
by James chen, cmt
a bear traP
11
by michael vassar
traDing breakoutS
13
by Sam Seiden
meaSuring the move
15
by michael kahn, cmt
uSing the 50 Dma
17
by brian Shannon
october beSt buyS
19
by Jeffrey a. hirsch
the gaP-uP reverSal
21
by Joey fundora
traDing iPoS
23
by michael g. milligan
this series was originally published from January to December 2009.
© 2009 Sfo magazine. all rights reserved.
play The inTraday wedge
by robert t. zukowski, cmt
January 2009
extreme moves on an intraday basis often produce trading patterns such as flags, pennants,
v bottoms, gaps and wedges. the trading environment in most markets since may [may
2008-January 2009] is perhaps the most volatile in decades. it is the day-to-day and week-to-
week price volatility that breeds fast-forming trading patterns such as the wedge. the wedge
pattern is one of those key chart formations that often develops when extreme moves have
become the norm during a short period.
The SeTup
the wedge pattern more often than not sets up as a continuation pattern but can sometimes
be labelled as a reversal. this pattern can develop on any timeframe chart—monthly, weekly,
daily or hourly. it is more easily noticed on an hourly chart and offers trading value.
the wedge comes in two forms. a falling wedge slopes against the previous uptrend and
is viewed as a bullish continuation pattern. a rising wedge slopes against the previous down-
Figure 1:
Hourly U.S. Dollar/Canadian Dollar Chart
1.21
1.20
1.19
1.18
1.17
1.16
1.15
1.14
1.13
1.12
1.11
Wedge
Wedge target = 1.1852
Start of breakout
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Measuring technique: Widest part of wedge projected up
from breakout point (1.2127 - 1.1675) + 1.1400 = 1.1852
10/10/08
10/12/08
10/13/08
10/14/08
10/15/08
Source: 4caSt inc.
1
>
trend and is viewed as a bearish continuation pattern. here, i the focus on a falling wedge.
though, traders should be aware that the same rules basically apply to a rising wedge with
some minor modification.
the following are the criteria for a falling wedge pattern:
• a sharp move up, followed by an immediate sharp move down. this can potentially retrace
anywhere from 38.2 percent to 61.8 percent of the prior move but can sometimes even
extend further and should not exceed 100 percent of the prior trend.
• once the pattern is roughly three-fourths complete, the distinct wedge appearance will
become more noticeable, highlighted by the converging upper and lower trendlines.
• volume will begin to contract as the upper and lower trendlines continue to converge.
when the breakout starts to take shape, volume should expand and add some confirmation
to the breakout.
geTTing in
a buy signal is triggered when the upper trendline is penetrated (see figure 1). however, it is
recommended that a smaller position be taken at the trendline breakout because potential
always exists for the market to dip back into the pattern before surging. when the market is
able to retrace 38.2 percent of the prior down move, the position can be increased at that time
or on the next small pullback.
wedge patterns generally produce violent breakouts, so staying nimble helps. the mea-
suring technique involved is straightforward. take the widest part of the wedge pattern and
project that distance up from the breakout point to calculate the main target.
geTTing OuT
Profits should be taken when the wedge target has been reached. Some traders may prefer to
let profits ride even if the objective has been achieved. there is nothing wrong with that as long
as the protective sell stop is adjusted upward to a point where the majority of the gains will be
maintained if the market starts to reverse course.
robert t. zukowski, cmt, is chief technical analyst at 4caSt inc. in new york city.
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2
>
picking TOpS and bOTTOmS
by rajoo Sharma
february 2009
most traders believe that attempting to pick tops and bottoms is a low-odds play. the con-
sensus advice is that one will probably do better staying with the dominant or primary trend.
but in a small percentage of instances, if done correctly, bucking the trend can be rewarding.
according to the methodology we use at vcm Proprietary trading room, picking intraday tops
and bottoms requires no more than a visual inspection of the candlestick chart—no indica-
tors—just the price, volume and the 20-period moving average (20 ma).
The SeTup
let’s take a look at the long setup. the reverse holds true for a short entry. look for five or more
consecutive bars with lower highs and lower lows. then, the stock needs to separate exces-
sively farther than “normal” from the 20 ma. in order to “confirm” the setup, one of the following
scenarios must emerge:
a) the last bar should be the widest and should be accompanied by a volume surge.
Figure 1:
2-minute Chart Constellation Energy Sept. 17, 2008
20 MA
200 MA
Exit 2
36.00
Target 2
30.90
Target 1
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Entry at the
Exit 1
30% retracement
151,884
11:00 11:30 12:00 12:30 13:00 13:30 14:00 14:30 15:00 15:30 9/17
Source: vcm trader Platform
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