|Buying high relative strength stocks is one of the smarter ways for the average retail trader/investor to interact with the stock market; of that there can be little doubt. The big issue for most traders is deciding on which kind of entry trigger to use once they've located a fundamentally attractive, high relative strength stock. In this article, we'll look at a simple, relatively low-risk entry trigger, one that comes standard in MetaStock, applied to the daily chart of Bucyrus International (BUCY), and then we'll examine some of the other technicals to see if this stock might yet have enough firepower to make it back to the highs (near $69) it established in January 2010.|
|FIGURE 1: BUCY, DAILY. Strong relative strength, a proportional retracement, a key reversal near major support, and a wide-range RMO swing buy signal. These are the raw ingredients, but to make this trade setup work successfully, a trader still needs to wisely choose his trade entry/exit strategy and determine how many shares to allocate to the trade so the risk is no more than 1% to 2% of account equity.|
|Graphic provided by: MetaStock.|
|Graphic provided by: Rahul Mohindar (RMO) indicators from MetaStock v.1.|
|BUCY appears to be swiftly emerging from a proportional retracement move against its dominant long-term uptrend. There is a lot to appreciate on this chart, so here's a point-by-point listing of the most positive attributes in this new buy setup:|
1. The long-term and short-term money flow is positive (see the Chaikin money flow (CMF)(34) indicator at the bottom of the chart), a prerequisite for a sustained swing move.
2. The RMO (Rahul Mohindar) oscillator at the top of the chart is above its zero line and is also rising, another bullish omen.
3. The stock has exceptional long-term relative strength versus the S&P 500, outperforming across numerous time periods.
4. BUCY staged a strong reversal (note the key reversal bar in the blue oval) just above a very strong area of Fibonacci confluence that resides at $46.50 and $46, respectively. Bullish key reversal bars like this are visual representations of a market that has plenty of demand at a given price level.
5. Following the key reversal comes the trade entry trigger, a new RMO swing trade buy signal (see green oval on chart) that printed on such wide range and heavy volume that it enabled the stock to close well above its 50-day exponential moving average (EMA).
6. BUCY has above-average earnings growth estimates for the next few quarters, another factor that might also suggest higher prices in this stock.
As long as the broad market continues to follow through with higher closes for the next week or two, BUCY should have little trouble embarking on a run to challenge January's high. Of course, we can't be certain if the stock will meet or exceed that particular high on this swing move, but given the balance of the technicals, the odds favor higher prices over the next few sessions.
|If entering on a buy-stop at Tuesday's open, consider only putting half your position on at that time and before waiting for an intraday 15- to 30-minute retracement to put on the second half. The reason I suggest this two-stage entry is because of the very wide range RMO signal bar; there is a high probability of an intraday pullback before prices continue to climb again. |
Once filled on either or both orders, place an initial stop near $52.80, a few ticks below last Wednesday's low. If the trade cooperates and moves higher, run a simple Gann swing line trailing stop (a three-bar traing stop of the daily lows) until stopped out for a gain or a loss. Traders not convinced of a strong runup toward $69 might also consider taking partial profits if $65 is seen on this swing. There are many ways to manage this trade, so consider your options carefully before you even commit a dollar of your capital to any trade. The goal is to make money -- by first limiting your losses and then by letting winning trades run in an intelligent manner. See how well you can make that happen, should you choose to take this trade setup.
|Title:||Writer, market consultant|
|Company:||Linear Trading Systems LLC|
|Jacksonville, FL 32217|
|Phone # for sales:||904-239-9564|
Traders' Resource Links
|Linear Trading Systems LLC has not added any product or service information to TRADERS' RESOURCE.|
Click here for more information about our publications!