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VOLUME


AAPL: Spotting Potential Reversal Zones In Advance

06/11/15 06:18:31 PM
by Donald W. Pendergast, Jr.

Learning to spot high-probability support/resistance zones in advance can help intraday traders gain a valuable edge in the markets.

Security:   AAPL
Position:   N/A

Intraday trading is perfect for those who seek to profit from high volatility, high volume, large cap stocks without having to worry about holding positions overnight; there are a zillion ways to day trade, but almost all of them can be greatly improved by making the most of the major support/resistance (demand/supply) price zones that a stock may be anticipated to interact with during the course of a trading day. Here's a closer look at one way to use a volume-profile style chart to help identify a potential demand zone, initiate trades, and take profits at a likely supply zone — using intraday charts of Apple Inc. (AAPL) as a guide.

Figure 1. 60-minute Chart Of Apple, Inc. (AAPL). The demand (support) area defined by the red histogram between 128.55 and 128.95 was observable a full two weeks before AAPL actually touched that price zone and experienced a bullish intraday reversal.
Graphic provided by: TradeStation.
Graphic provided by: Trend Profile from www.trading-algo.com.
 
Day and swing traders can learn much every trading day by plotting a 60-minute Trend Profile chart for the stock(s) they plan to trade the next session; the hourly chart in Figure 1 for AAPL revealed as far back as May 22, 2015 that there were several high-probability demand (support) zones at the following price levels:

A. 129.85 to 130.75 (wide red/blue histogram)
B. 128.55 to 128.95 (red histogram that is the focus of this article)
C. A major demand zone between 126.00 and 127.00

Having worked with the Trend Profile charts for several months now, I am constantly amazed at how well they define "real world" support/resistance zones on a variety of large-cap stocks, indexes, and exchange traded funds. Using these charts in TradeStation 9.1 has revolutionized the way I analyze — and trade — the markets. Therefore, as I saw AAPL descend close to the noticeable red histogram just below 129.00, I began to check other key indicators to prepare for a possible bullish reversal trade setup:

1. My intraday range bar chart was heading into its regular 18-period cycle low.
2. The stock was in an oversold indicator zone (green dotes below price bars on two-minute chart).
3. The long tails on my two-minute APPL bar chart (Figure 2) provided visual confirmation that this was indeed the start of a demand zone.
4. All of this was occurring near a lower Keltner band on the two-minute chart; many powerful reversals occur near these volatility bands.
5. Next, a two-bar reversal pattern occurred (the highest high of the previous two bars was exceeded) and this was my call to enter a long trade position.
6. AAPL rapidly shifted into upside mode; I already had a profit target identified by looking at my 15-minute Trend Profile chart (Figure 3) which suggested that the start of the heavy red supply zone near 129.50 would be an ideal exit zone. I exited near 129.39 just to be safe — pushing trades like this to the limit can result in a lot of lost open profit if things turn bad without warning, after all. APPL did run a few cents higher, ultimately stalling out at 129.41. So, the trade netted 30 cents or about .23% in 10 minutes.

The next trade was also a long one; since I already knew the previous low was significant, once a higher low formed it was time to look for the next entry trigger. I put on about 1/3 of my long position on another two-bar reversal and then added the remaining portion once APPL broke above a beautiful congestion zone at 129.24. I exited a few minutes later at 129.45 as APPL made a strong push higher on a single two-minute bar. With an average cost of 129.21 for the position, this made for a .185% profit in about 24 minutes. Both of these trades were taken because the Trend Profile chart had accurately identified a significant demand zone, one that gave me a usable edge and added confidence.

Figure 2. Two-minute Chart Of AAPL. Here you see a play by play analysis of a successful pair of trend reversal trades built upon the identification of a powerful demand area located just below 129.00.
Graphic provided by: TradeStation.
Graphic provided by: ProfitTrader7 from www.walterbressert.com.
 
Day trading is a game of science, experience, and intuition to be sure, but if you can add to this mix a highly reliable method of identifying key supply/demand zones in advance, well, the game gets a whole lot easier, more fun, and more profitable.

Trade wisely until we meet here again.

Figure 3. 15-minute Trend Profile Chart of AAPL. Here you see that the lower end of the heavy red supply zone was a good place to take profits on the two long trades described here. Note how price retraced once it got close to this red zone.
Graphic provided by: TradeStation.
Graphic provided by: Trend Profile from www.trading-algo.com.
 



Donald W. Pendergast, Jr.

Freelance financial markets writer and online publisher of the Trendzetterz.com S&P 500 Weekly Forecast service.

Title: Market consultant and writer
Company: Trendzetterz
Address: 81 Hickory Hollow Drive
Crossville, TN 38555
Phone # for sales: 904-303-4814
Website: trendzetterz.com
E-mail address: support@trendzetterz.com

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