Stalking Two Setup Trades

 | Feb 27, 2013 | 9:30 AM EST
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When I'm looking to enter a stock on a pullback, one of the first things I look at is the prior corrective swings within the trend. Since we are looking at a pattern of higher highs and higher lows, which is considered an uptrend, I am looking for the prior corrective declines within the uptrend. Note that on the first chart of Expedia (EXPE) below, I have labeled a few of these prior declines. You can see swings between $7.09-$9.58. I have projected 100% of these prior swings from the most recent high made on Feb. 5, 2013.

Expedia (EXPE) -- Daily 1
Source: Dynamic Trader

These measured moves or "symmetry" projections help identify areas where we can look for possible support, since many corrective swings can be similar. Besides running the projections, I also run all possible Fibonacci retracements and extensions and then see where they overlap. A zone that has quite a few overlapping price relationships indicates a key support decision. I see two standout zones at this point on the daily chart. Let's take a closer look at these on the second chart below.

Expedia (EXPE) -- Daily 2
Source: Dynamic Trader

These zones are what I would call a Fibonacci price cluster setup. The definition is the coincidence of at least three key Fibonacci price relationships that come together within a relatively tight range. These zones identify key support or resistance decisions in the market. In this case, we are looking at a couple of support decisions. When there are more than three levels, I do consider it a more important decision, but keep in mind that this does not mean that the area will definitely hold. It just means it is an important decision.

The first zone comes in at the $60.87-$61.45 area. It includes a .618 retracement of one swing along with a couple of price projections and extensions. The second zone comes in at 58.51-60.03, which also includes the coincidence of some 100% projections of the prior corrective declines along with other retracements and extensions of prior swings.

There was a buy trigger against higher levels a couple of days ago that was stopped out because there was no follow-through to the upside after the initial bounce off the higher support, but I still like the overall pattern of this stock enough to take another look against these next two price support decisions. It doesn't hurt that S&P 500 held some key support in today's session, which I posted yesterday in Real Money's Columnist Conversation section. If it does hold above the most recent low, the current target becomes the $69.89 area. If a new low is made instead, I will need to recalculate the target for you. The risk can be defined either below the low made prior to the buy trigger or below the zone you are placing the bet against.

So, we have two trade setup zones to stalk. As long as we continue to hold above one of them, you will want to go down to a 30-minute chart and watch for a buy trigger against the zone for a swing trade entry. For a daytrade, you can use a lower time-frame trigger, such as a five-minute, instead.

For more information on about how to trigger into one of my trade setups, please refer to my guidelines.

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