Following on from last week’s note about railroad tracks, here’s a quick follow up.
For avoidance of any doubt, our bread and butter trading is using the OVI for breakouts and continuation patterns.
However, once in a while a decent reversal pattern presents itself by way of Doji bar extremes and even rarer, railroad tracks. For reversal patterns we do not use the OVI.
Both AAPL and AMZN did reverse, AAPL somewhat meekly before slipping down again, and AMZN more violently. Neither were perfect setups but they were ok. A perfect setup is where both tracks protrude into new price extremes almost in their entirety. This is a very rare phenomenon, so I’ve loosened the criteria a little.
With AAPL your worst case scenario was a scratch trade as the stock stalled for three days after the reversal before resuming its down trend. That’s if you got in at all, because it’s initial reversal was a gap to the upside.
With AMZN, this was a case of taking half profits on Day 1 of the reversal, and then being stopped out on Day 2, thereby still securing a handsome profit.
Last week I mentioned that the markets were beginning to look a bit stretched. Yesterday, the indices formed modest railroad tracks – how’s that for convenience!
The S&P 500 index you can see clearly. Again, I must emphasise, it’s better to have both tracks protruding into new price extremes in their entirety. However, this does look like a reversal waiting to happen.
Interestingly the SPY (ETF of the S&P) does not form a railroad track, but yesterday’s down bar does look somewhat ominous.
The DJ-30 has a similar pattern, as you’d expect.
Other stocks looking vulnerable to a RRT reversal include CIR, but this is very thinly traded, so great care with that one – and naturally there are no clues from the OVI here either. If the stock is illiquid, the options have no chance of giving us a proper clue!
Also there’s SIRI, the fantastic radio service company which looks like a RRT candidate to the downside. No clues from the OVI here.
Remember, with any of our strategies we always have to play the price breakout. We do not place any money at risk until the breakout is in process.
Anyway, that’s just a taster for this usually-scarce but powerful reversal pattern if you’re being strict with its composition. I did mention that I was developing formulae to find RRTs and these are a few that have been identified, even if they’re not plum perfect.
All the best
Guy
