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TRADING SYSTEMS


Amphenol's Short-Term Buy Signal

11/03/09 09:09:57 AM
by Donald W. Pendergast, Jr.

With the broad markets likely to stage a modest bounce in the next few sessions, low-risk momentum plays can be a wise choice.

Security:   APH
Position:   Buy

The past couple of weeks brought back memories of the market plunges of 2007–08, and they weren't very comforting memories. However, with the Standard & Poor's 500 and Russell 2000 indexes likely at a swing low, scanning the market for low-risk long setups might be a great way to take advantage of a near-term bounce in the markets. Right now, Amphenol (APH) common stock appears ready to move higher in the wake of a proven trading system's long entry signal. We'll look at that trade setup now.

FIGURE 1: APH, DAILY. A momentum buy signal in a strong relative strength stock that arrives after several successful tests of support should always be given the benefit of the doubt.
Graphic provided by: MetaStock.
 
If you're a regular reader of Traders.com Advantage, you've probably begun to realize that successful trading is far more dependent on steady doses of common sense, self-discipline, and overall market context than it is on finding perfect trade setups and/or magic indicators and trading systems.

Keeping that general assertion in mind, take a glance at the current daily chart for APH (Figure 1). Here, we find many of the technical ingredients necessary to enable a relatively pain-free and objective decision as to whether to take this trade. First of all, we see that the stock began an uptrend phase in early October and has spent most of the past two weeks consolidating those gains. The stock failed to sell off hard, refusing to violate the long-term Intellistops (blue dots on chart), a sign that also confirms the fact that APH has high relative strength compared to most other stocks in the broad market. APH also has very strong long-term money flows, as evidenced by the Chaikin money flow (CMF)(144) indicator at the bottom of the chart.

The money flow is far above its zero line and it held up during the recent consolidation pattern as well. APH has repeatedly respected the strong support area near $40, never failing to turn higher after each encounter with that price zone, and the most recent reversal bar is no exception. In fact, this fresh reversal bar has also triggered a new 4-9 EMA crossover signal, one occurring with the stock already above its 18-period EMA. This is a faster variation of RC Allen's famous 1972 commodity trading system (which used a 9-18 EMA crossover to trigger long trade entries), and it seems to work well on stocks in today's volatile markets, all else being equal.

With the signal arriving after a well-defined period of consolidation in the midst of an existing uptrend, this certainly does seem to fit into the common-sense style of trading that I alluded to earlier. Finally, the volume on the reversal bar is also above average, another positive sign that bodes favorably for the trader choosing to take this long entry setup.

Trade management can be as simple or complex as you desire, but personal experience has shown me that the KISS ("Keep it simple, stupid") method of trade management is always the best course of action. Since there is a high likelihood of a broad market bounce this week, why not just put on half a position at the next session's open and then wait for some modest follow-through before adding the second half of the position just above Monday's high near $41.47? Once filled on either order, place an initial sell-stop just below the consolidation low (the last four bars of the pattern feature strong support near $40, making a sell-stop of $39.90 a good starting point).

If the trade follows through as planned, consider trailing everything with a three-bar trailing stop of the lows, taking partial profits if the recent high at $42.40 is reached. At that point, trail the position with a two-bar trailing stop of the lows until the trade finally runs out of gas. I don't recommend holding this trade as a trend-following type move because the broad market is very likely to move into a C wave down once the anticipated B wave higher completes. If APH runs higher after your initial entry, using the trade management plan recommended should help you secure profits and clear out of Dodge before that anticipated big, bad C-wave down swing commences.



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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Date: 11/03/09Rank: 5Comment: 
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