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SUPPORT & RESISTANCE


Monster Reversal From Major Support

11/19/09 09:26:31 AM
by Donald W. Pendergast, Jr.

Do the broad US markets still have enough get-up-and-go to recover from the recent round of losses? Perhaps. Here's an encouraging breakout/momentum play in an up-and-coming S&P 500 component stock that's on the move.

Security:   MWW
Position:   Buy

Monster Worldwide shares (MWW) launched higher today in the wake of a successful test of key Fibonacci support, also triggering a long entry signal from a successful trading system to boot. Can this stock make up its recent losses on this new breakout move? MWW's daily chart (Figure 1) reveals that the odds favor higher prices, perhaps up to previous swing highs.

FIGURE 1: MWW, DAILY. While no one can know how far a successful breakout may carry, the fact that the money flow trends are also turning higher in the wake of a successful test of support can only help tip the scales in favor of new long positions here.
Graphic provided by: MetaStock.
 
MWW had a terrific trend run from early July 2009 until mid-September 2009, tacking on gains of about 100% in just 10 weeks. Since then, the stock has been tracing out a corrective pattern and with the market theatrics of the past few weeks hopefully behind us, the stock has made a very convincing break higher after interacting with the Fibonacci 50% retracement level (see the blue grid on the chart) of the mammoth July–September trend thrust. The support level (near $14) held on a retest and today's wide-range breakout move should be given every benefit of the doubt, and here's why:

1. A strong bullish reversal off of a key Fibonacci support level.
2. A fresh money flow crossover — the short-term Chaikin money flow indicator (CMF)(34) line — has crossed the long term (CMF)(144) line in a very pronounced fashion (bottom of chart). In many cases, these 34 x 144 CMF crossovers do a good job of alerting traders and investors that a significant trend reversal is under way (or soon to occur). There can be false signals, of course, so only use this particular technical tool as part of a well-founded trading strategy.
3. A new 4 x 9 EMA crossover (large blue oval on chart) has occurred, one that has taken prices above the 18-period exponential moving average (EMA) as well.

MWW's weekly chart (not shown) is also experiencing very bullish long- and short-term money flow trends and the Fibonacci 38% retracement level of the huge March—September 2009 trend move also acted as a major support barrier.

FIGURE 2: S&P 500. Of all the S&P 500 index stock issuing 4-9-18 EMA crossover buy signals today, MWW has the top cumulative relative strength rank.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Of all the stocks in the S&P 500 flashing 4-9-18 EMA buy signals today, MWW has the highest-weighted relative strength ranking of the six stocks that issued long entry signals (Figure 2). All else being equal, you want to pick the stocks with the best weighted three-, six-, and 12-month relative strength ranking, which is why MWW was selected for further analysis and First Tennessee (FHN) was not. Makes sense, right? Why go for a breakout setup on a long-term "dud" stock that will likely end up as another loser? Putting relative strength to work as a powerful complement to your own trading system could work wonders for you, especially if you've never considered implementing it in your own trading and investing.

That said, how to play MWW here? Covered calls might be risky until we see if the prior highs can be taken out, so why not play this as a pure breakout move:

At the next session's open, prepare a buy-stop order to go long on a break above today's high at $16.37, holding half of your allocated trade capital in reserve for a possible intraday retracement (very likely after such a sharp one-day move), perhaps down toward $16 or even $15.90. Once filled on both orders, place an initial stop below Wednesday's low near $14.94. Then follow the trade with a three-bar trailing stop of the daily lows, taking half of the trade off if you see $17.60 hit (the 79% retracement of the recent down swing). At that point (if that price is actually reached), run a two-bar trailing stop for the balance of the trade, being aware that the $18.70 to $19.40 area will also be an area in which to expect MWW to temporarily stall and/or reverse.

Overall, this looks like a very sane long trade setup; they probably won't call the men in the white coats should you commit your capital to this trade, pulling the trigger in anticipation of booking a decent profit.



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: 11/20/09Rank: 5Comment: 
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