A Trade A Day

Do you have a go-to setup? Something you know has a high probability of success. Something you know that when you see it, you’re going to make money.

I have one setup that is my “money trade”. It’s hard not to get excited when I see it.

The setup is very simple. I want to see a stock in a confirmed up trend, the longer the better. Next I want to see the stock get slammed downward, the steeper the drop the better. Finally, I want to see the stock consolidate forming a base or flag.

Simple enough, so let’s look a little deeper and talk about the emotion behind the trade. Remember: emotion equals opportunity.

First the confirmed uptrend. The stock has been moving higher for some time. The public is buying, jumping on the bandwagon, giving each other high-fives, then BAM! The stock sells off, in a big way. This decline can be over a few days, but it’s sudden and dramatic. An eyesore in what was a sickeningly positive uptrend.

Of course, this causes some nervousness in those with positions in the stock. A potential “chink” in the armor. Obvious to the smart money. However, the stock will continue to be touted by talking heads, mainstream media, and brokers. So what happens? People keep buying or holding at a minimum. But the smart money has left or is in distribution mode. So, the stock never recovers from it’s decent.

What you end up getting is consolidation after the drop in the form of a flag or a base. Then the stock breaks through support and continues it’s decent. Much to the disappointment of those who have been buying for their retirement accounts, kids college, whatever. The general public unloads, but the selling is gradual. So we get a nice downtrend after the break.

KO is forming this type of pattern. Let’s look at the weekly chart. You’ll see what I mean.

KO has been trending up since October of 2006. KO is historically a slow mover, but over the past several months we’ve seen ATR increase 100% (from 1 to 2). Then during the second week of January 08 it all came to an abrupt, brutal halt. KO sold off and did so the following week.

Then comes the consolidation. KO has been forming a triangle on the weekly. So my play will be under the pivot low of the triangle. That would be 56.49 for those keeping score.

Let’s take a look at the daily chart.

Now that I look at it more closely, the daily consolidation is more of a flag, but the concept is the same. There’s also an entry under 57.31.

Want to really juice this setup? Find a stock that has gone parabolic. The more emotion in the chart (extreme buying) the better the setup.

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