T3 Live: How to Play an Oversold Bounce

Wednesday, August 3, 2011 Brought to you by T3Live.com   Off the Charts is the next evolution of T3 Live's daily watchlist, stocks in-play, and chart patterns. For the swing trader, view T3 Live's favorite actionable trading set-ups each day via annotated charts with in-depth commentary.  Sellers came into the market early and faded the small gap up in the indices. The move was fast and broke some key support areas in the SPY, including the low from the Japan crisis, $125.28.  Going into today, the market had 8 straight days of selling, and with oscillators showing very oversold levels traders were looking for a bounce. When selling intensified early in the day and appeared climactic, it provided an 80-20 reversal entry.    After the market was pressured for the first hour of trading, the leaders in the tech sector like AAPL, AMZN, NFLX, and BIDU started bouncing off the morning lows, giving some indications that the market could bounce as well.  A calculated way to buy the dip is with the 80/20 Red Dog Reversal Strategy. In this case, it was a buy against the morning low, $125.53, with an additional add through the previous low of $125.49.  This reversal strategy is a way to capitalize on an oversold bounce when the market was extended on the downside.  The stop on this trade is $125.53.  Now that we have the strategy we need to see what this leads to. Is it the start of a new move or just a cash flow trade to relieve some short term pressure?  $127.50 is the first resistance area, which is the retest of the neckline in the macro Head and Shoulders Pattern, and the next major resistance area is $128.30-.80, a retest of the 200-day moving average.             QQQ, the stronger index compared to the S&P, the DOW, and the Russell, gave an 80/20 Reversal trade as well.  This is a calculated strategy to buy a dip.                 The XRT, the retail ETF, gave an 80/20 entry today, as well.  After seeing a few days of selling, the prudent trader is patiently waiting for an opportunity to buy a dip for a potential reversal trade.  This does not mean the selling is over in the XRT, however it is a good, calculated trade for cash flow, when entering into oversold territories.       AXP is another example of an 80/20 trade.  ENTRY: yesterday's low: $48.50.  STOP: low of the day: $47.53.  This could be the start of a swing trade or it could just be an oversold bounce to relieve some short term pressure.  Watch the price action to take profits on the trade.             In yesterday's newsletter, NFLX was highlighted as a market leader that started breaking the upside momentum before the market.  Also, NFLX had not closed below support of the 100-day moving average which was $250.92 in a few years.  It came into this support in the first hour of trading before bouncing and closing the day +1%, showing relative strength to the market.  NFLX is creating a steep downtrend line as it pulls off from highs, if it trades above the downtrend line on volume, that will be next entry in NFLX.  Use this as a gauge for the market.       Today we saw a lot of 80/20 reversal trades as stocks and indicies were extended to the downside.  You can also use the 80/20 strategy to find a calculated short when a stock is extended on the upside.  Gold opened at new highs this morning, and gave a calculated short entry when it began to trade through yesterday's high of $161.62.  Stops are today's high, $162.86.  If this trade leads to more downside action, it could give more confidence to a bounce in the market.  GLD could see a move down to $155.40, the 21-day moving average, without causing any technical damage to the recent strength.       Tune in live at T3Live.com for tomorrow's Morning Call with Scott Redler at 7:30 am for an update on the markets.