Not just UBS there were plenty of others that played the short game ......
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Never buy a stock in a downtrend... never try to catch a falling knife... generally very good rules to live by. But is there a way to try pick a bottom without getting s**t on your fingers?
Moments of extreme fear (i.e. large drops) actually provide a greatrisk/reward opportunity to try and pick a long term bottom. Let me show you how I take advantage of these extreme fear scenarios to take establish essentially risk free long term positions.
The Basis for My Entry
Fundamentals:
- FPH is considered a 'best of breed' stock on the NZX. It always trades at a premium. Funds love it and don't like to be underweight on it. It has a strong history of performance
- Recent FPH downgrade has brought weakness. Short term fundamentals appear to have weakened, long term still appear strong
- I want a long term position in this stock in case it returns to glory. Fundamentals aren't where I have an edge over the market (acknowledge your own weaknesses), so I will rely on my technical expertise
Technicals:
- Daily RSI is oversold (below 30). FPH historically has strong bounces after each daily oversold level. Refer to daily chart: https://www.tradingview.com/x/vTfkihfG/
- Weekly RSI is oversold (below 30). It has not reached oversold since FPH began its massive bull trend 10 years ago. Previous RSI lows have been very good long term buying points, or at least seen large rallies
- Acknowledge the limitations of RSI. This is a news driven event, which means RSI levels can go to much more extreme levels. It can always go lower.
- We are in a daily, weekly and monthly downtrend. Doesn't really get more bearish than that. Weekly chart showing break of significant support line: https://www.tradingview.com/x/sgRGU2Xn/
You've probably just read that last line and think I'm absolutely mad looking for a position, but stick with me.
The Strategy
Extreme fear scenarios almost always lead to an oversold bounce. The reliability of these bounces means that if I can build a position around the fear lows, I can sell a portion of my position very quickly into a bounce. I can set my stoploss below the low, with the profit from the position I have sold covering the loss on the remaining position if my stoploss triggers. I am risk free on the long term position (unless there's a gap down). I think it's more likely than not that my stoploss will trigger at some point (daily, weekly, monthly downtrend), however I want this position in case this is the bottom.
Sounds easy, but trading oversold bounces is an extremely difficult skill to develop and really you never stop learning... each one is slightly different. Build your position at the wrong point and boy it can absolutely blow up in your face. This is a very aggressive strategy. Let's zoom in an have a look.
The FPH Trade
I want 5min, 15min, and hourly RSI all oversold and as low as possible. I want fear and liquidations.
Day 1: with news driven drops I am not interested in a bounce on the first day (unless I quick day trade).
Day 2: Big gap down open, lower volume on open. I am not so interested on 2 day as the day to set the bottom, however the gap down has me looking for a bounce (which I day traded, but that's another story).
Day 3: Right, I'm interested.
Plan A
Based on the action from Day 2, I thought I may have missed my optimum 'enter on fear' position. https://www.tradingview.com/x/anK8Yt5U/ Looking at the hourly chart, (day 2 covered by the Fib retracement chart) you will see a strong bounce off the open,an hourly lower high set the next candle, a drop to hold the lows, then a 62% bounce retracement on larger volume (this is critical). I thought it was likely that the low was in, so my entry would now be looking for an hourly pullback (I'm not buying as it's going up as I need support to play off to manage risk) to form an hourly higher low (an hourly equilibrium had formed).
On the ASX open, we pulled back into that key 2260 area which should see support. I'm in. Stop below 2250, as if that breaks I am back to waiting for more fear. This isn't my ideal setup, so I'm very quick to sell half in the 2270's to get close to risk free on the very next 1min candle. Long story short, I got stopped out and we were going lower (small loss). Over to Plan B.
Plan B
With the break of the previous days low I now want fear to come back. Let's look at a 1min chart: https://www.tradingview.com/x/qRm1AevB/
Rather than a flush, we see a slow grind down, forming a falling wedge. These are great bottoming patterns, they show sellers running out of momentum on each new bear break. Looking at the green bubble, I take my 1st position at the drop the the wedge support line with the volume spike. I am not aggressive here as 5min RSI is not that oversold... we can keep going much lower. And lower we do go. I did actually think this might be the low after that bounce on the 1min chart and I'd miss building a big enough position. I note the volume here is quite light compared to the bounce the day before (increasing confidence of a bounce).
The orange box is where I'm getting much more interested. 2nd position on the falling wedge support line. The bounce off this confirms the upper resistance wedge line. We reject off that resistance line and hold that previous low for 4 candles. We also have elevated volume. 3rd position. I can handle 2 more positions, but if 2214 breaks I'm stopping out of 1 position (so I can buy lower if it's going to keep dropping, or else I'm in trouble). I immediately sell 1 position as we near 1min resistance at 2230. I am now essentially risk free on the remaining position (what I intend to hold). The size of the 5 min bounce tells me the low should be in for the short term. Here's the 5min chart perspective: https://www.tradingview.com/x/SKixNlys/
Looking Ahead
This hourly bounce has retraced 75% from the low to the previous hourly high. This tells me that hourly low is not likely to break in the short term. The most likely scenario is that we reject below the previous hourly high at 2300, to form an hourly higher low and then a trend change. This can be another excellent entry point for a daily bounce (which I probably will to get another position or two). However with the setup of the daily chart I would not be surprised if we blow through it. https://www.tradingview.com/x/DX3v8ZA1/
Daily daily chart is a bullish hammer candle (reversal pattern): https://www.tradingview.com/x/OfuTUQnI/ The size of the bounce on the daily chart determines the probabilities of what happens next. If we reject around the 38% retracement level, then a bear flag is likely and further lows expected. If we get to the 50% region or above then we can expect an equilibrium to play (which may then either resolve upwards or downwards).
I expect I'll get stopped out at some point. I am day trading this too so will book profit on the daily bounce.
Please do not try to replicate this as you will more than likely get yourself smoked. It takes a lot of practice. What I've outlined here is only a portion of what I'm looking at and doesn't give the entire picture.
Thanks JT. Good luck mate
2 year low today, shine definately gone for now along with the Covid threat !!
I thought the same with XRO when it went from $45 down to $12, well take a look at me now, check out its PE to boot. The Covid threat is far from gone, unlike A2 i would never sell this high quality company with a worldwide market for a permanent loss, I will get to work shorting my own shares once I have finished doing so with a certain other long term hold.
I am surprised that JTH's bounce didn't materialise and it keeps making newer lows ...must be getting close to attractive ...even W69 is now positive LT
But u never know with FPH ...it always overshoots a lot both sides ...
Down $4.47 or a whopping 16% in just one week !
The plain fact of the matter is that while this is a very good company, no doubt about that, but based on Friday's closing price and the average forecast of the brokers its still trading on a whopping 41 times FY23 earnings. https://www.marketscreener.com/quote...30/financials/
On a fundamental basis, even after a pretty serious decline that's still really, really expensive and of the course on a TA basis the downtrend is very well established. Catching a falling knife is a very risky game to play. I think there's plenty more scope for this downtrend to run for quite a while yet.
If you go back and have a look at the long term price chart RTM kindly posted at #2418 its only got to overshoot a little bit on the downside of that long term trend line and $20 looks a very real prospect. If it overshoots by a fair bit ~ $17 is a chance.
People with fresh capital to deploy here would do well to consider sitting on their paws until there's a confirmed bottoming process and a new uptrend starts.