On Friday the markets saw some positive economic signs as the jobs number recovered much better than anticipated. The DJIA had a 200-point range, moving higher for most of the day, then into negative territory, to finish up slightly positive on the day. Many traders were pulled in towards the top of the move, taking the momentum trade.
Two things kept me out of that trade.
- The market opened with a huge volume spike - which shows panic buying, and is likely to subside over time. In this case, it subsided quickly as the market reversed. This seemed like a classic buy on rumor, sell on news occurrence.
- The market gapped open from the previous day's close. While I am not a strict gap trader, I do tend to stray away from gaps when looking at bullish trades as most gaps do tend to fill over time. I view this as another sign of panic buying.
Over the day, however, two trades did come up on the screener. MET Life (MET), and L-3 Communications (LLL). For the sake of discussion, I will cover the MET trade.
Below is a 60-minute chart of the price and volume action on Friday.
What you are seeing here has several reversal signals working for us.
- On the 2:30 bar, we see a bullish engulfing pattern (meaning the bar opened lower, but quickly consumes all of the price action of the previous bar) that punches through the 8- and 21-period SMA. In my view, this is a strong move.
- As well, we have a nearly oversold stochastic, indicating there has been recent selling pressure on the stock. The bullish reversal pattern above shows that this is likely over.
- Finally, we see that all of this action is occurring on increasing volume. This means that there are more buyers than sellers, and thus there is some strength to the move.
What's the result?
Trading conservatively and waiting for the move to confirm means you entered at the open of the 3:30 bar, or $35.16 and closed out the day at $35.32 - a gain of 16 cents in just under half an hour!
Trading more aggressively, as I do (especially when I have this many confirmations), I entered the trade at the high of the previous bar or $34.69 for a profit of 63 cents in just over an hour.
No complaints on my part!
