Tuesday, October 20, 2009

GFA: A Lesson in Intraday Dip Buying.

GFA is a recent Brazilian high flyer stock. Price has been stuck in a narrow range for last four trading days, printing a NR-4 candle on the daily chart yesterday.

Today GFA decided to resolute to the downside with a huge sell off. Intraday price was down as much as 10%, breaking Intraday S1/S2/S3 pivots and 5/10 daily MA’s. When a high flyer like GFA faces that sort sell off, it is often rewarding to look for an intraday bounce and find a logical place for it. In this case 10 MA was breached with fury right after 11AM. The next logical place would be 20 MA, surely price touches 32.11(20 MA is around 32.20) and bounces right off with a beautiful reversal candle. A limit buy order around 32.20 with a stop right under whole number 32 would have been rewarding. As you can see price bounced off 20 MA, retraced first to 38% at 33.60, next 50% at 34.13. Once that was taken out, it preceded above 61% and capturing back the 10 MA on the daily. If you were able to catch the dip, it was good for a cool 2.5 points.

I believe given how some of the energy stocks have been climbing lately, we will see more setups like this. Be careful not to be too early to buy the dip as you might be catching a falling knife. The reversal from the support or MA’s has to be fast and furious with good volume almost in a ‘V’ shape. Pay attention to what kind of candle its forming. If it takes too long to reverse, don’t hesitate to get out flat or little loss, it might fall more.

PS: This strategy works best with day trading. I would not hold them over night.

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