Trends reach climactic levels when most market participants are skewed towards one side. Learning this Setup will help you nail the reversal points at prudent points for counter-trend trades.
Understanding the causes behind these patterns and intelligently Trading them present lucrative trading opportunities for those who recognize them.
At Master Trader, we have several criteria to define quality W-Bottom Reversal pattern.
These are based on the structure of the price pattern and confirmation.
In short, we are looking for momentum moves down (which creates a Price Void), followed by a counter-trend bounce of less than 1/3 of the momentum move down. Then the key is the next pullback and potent reversal at or around the prior low, Major Support (MS).
On 6/27, WBA had a bearish gap down and continued to sell off for an additional eight trading days, getting further extended from the 20-MA, before bouncing.
On 7/18, it closed with a bearish engulfing bar and continued to fall before closing with a bullish reversal bar on 7/22, holding the prior MS. It went sideways, holding support, and closing above the 20-MA where shown.
That is our entry to go long with stock or call options. We are recommending buying call options here because they are liquid and give us the benefit of leverage and limited risk.
You can see how the overall pattern of SEDG is similar to WBA although the selloff that started in mid-June was more aggressive and steadier until it reached levels where demand exceeded supply and began to bounce.
On the subsequent retracement to MS, you also see the bullish reversal and close above the 20-MA and consolidation resistance. The most recent bar shown was a small gap up, closing red, below its open.
The entry on SEDG is over the high of this red bar with a bias to move higher into the Price Void. Although the pattern supports buying the stock (the call options are not liquid enough for a directional trade), we recommending selling an out-of-the money put spread as the pattern suggests the short $25 strike not being violated by Friday’s expiration.
We want a minimum net credit of $.21/share so if you sell 10 contracts when triggered, that will generate $210 of premium being deposited into your broker account which becomes profit over time as it approaches 8/2 expiration and stays above $25. We call these Income Trades where we sell credit spreads around compelling turning points such as this W-Reversal with SEDG.
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