Trading a Parabolic Bounce

Hey guys and girls,

Figured I'd do something a little different here since I had some free time during the day and give y'all a peek into my thought process on some of the stocks I'm trading. One of my favorite setups to play is a parabolic bounce where the stock has been beaten down a ton over a period of several days and then has a strong bounce which you can hold for a couple days as the early shorts take their profits from way above.

My most recent one was REN which I posted in my sub at /r/1krobinhoodproject. It's actually a relatively simple play and easy to scan for since basically all you have to do is look for something that's been red for 6-10 days in a row and has dropped more than 40-50% over that time period. Ideally it will be sitting on support on the daily chart like REN was, and even better if it's a round number (e.g. anything ending in .50 or .00).

The idea is basically that stocks don't go straight down. They ebb and flow with the trends in the market, and so when a stock becomes too stretched it will snap back like a rubberband. The further it goes down with no rest, the more violent the snapback. It should be noted that you want something that has had a series of selling days...not just something that gets slammed on bad news. You don't want to try to "guess" the bottom or catch a falling knife. 99% of the time you will be wrong if you do this and will take a loss. Instead you're looking for a stock that is being sold constantly for several days with little to no rest so the sellers just exhaust themselves and over time it shows up on lots of peoples' radar.

So anyway, once a stock meets my criteria for a parabolic bounce (7 days down, greater than 40% drop, and minimum 500k shares average daily volume), there are a few indications I look for that a bounce is coming which allows me to time them pretty well.

• First you want to see the selling slow down (i.e. you want to see daily volume fade off and see the rate at which the stock is dropping start to slow down). This is where the early buyers will jump in and try to catch the knife. It's also usually where you will end up getting f'd.

• Once you see the buying slow down you wanna see a couple last minute dumps as the final sellers dump their positions, kick the early buyers' stop losses, and smart money starts filling their buy orders

• Over the next day or so you will start to see the stock show morning strength (rapid acceleration in the mornings accompanied by lots of volume). Once the stock shows morning buying strength you want to see it base above the major support. Also you will often see the stock close green this day.

• The next day is the buy. You're looking again for morning strength followed by a higher base than the previous day. Now you can buy any time and hold for the swing trade with a stop loss under the major daily support or under the lower base.

Here's an annotated chart on REN showing my thought process and an example. http://ift.tt/1JCWYuc

Subsequently REN has had a 25% bounce today. i sold half for a 15% gain so far and will hold the rest for the next couple days.

A couple other notes: These work best when the market is also in a bounce area, so look for areas where SPY can bounce, and also focus on the type of stock you're trading the bounce on and make sure its associated ETF can also bounce. In this case REN is an energy stock so I timed it with a bounce on SPY and also XLE (energy ETF). If you are trading a biotech stock, time it with a bounce in IBB, a consumer staple with XLP, etc. This way you have not only the dip buyers on the stock itself, but also dip buyers in the stock's sector and in the overall market as well.

Let me know if ya have any questions!

Chris

Submitted June 09, 2015 at 02:36PM by ghostofgbt http://ift.tt/1ItdGsT