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Until recently, there haven't been a whole lot of viable trade setups in Amazon (AMZN) in the past couple of months using my type of analysis. I want to recap this example in order to help you understand how you might apply this same methodology to any stock chart in the future.
After seeing Amazon take out the prior Feb. 21 swing high of $184.75 on the daily chart, I decided to apply the Fibonacci ratios to look for a trade setup. If this new bullish pattern was to remain intact, I wanted to see the price hold above the Feb. 27 low, so I focused on the price relationships above that level.
I found a setup I liked that was essentially a price cluster -- a coincidence of at least three or more price relationships -- that included key 100% projections, or symmetry, of the prior declines. Note that, on the daily chart below, the prior declines amounted to $8.25 and $7.71. I projected these prior swings from the new recent high made March 8. I also ran the Fibonacci price retracements of two prior swings -- the Feb. 16 low to the March 8 high and the Feb. 27 low to the March 8 high.
This was enough to identify a trade setup zone between $180.20 and $181.04. That area consisted of two 0.618 Fibonacci retracements and two 100% projections. This setup, along with the swings I used, are illustrated above.
The price started to test this key price support zone on March 13. Since the stock was holding above the key area, the next step was to look for a buy trigger to suggest that it was worth placing a bet against the zone. Amazon then made a slightly lower low into the zone on March 15, yet it still held above key support. (Note that the swing between the March 8 high to the March 15 low amounted to $8.08 -- similar to the two prior declines mentioned above.)
If you used a 30-minute chart for a trigger entry, this lower low signaled an entry on March 15, as the stock both took out a prior swing high and was confirmed by the moving-average crossover I like to use -- the eight-day exponential moving average over the 34-day EMA.. When you see this occur, to nail down an entry you can do one of two things: You can buy right there, or you can look at the next pullback (50% to 0.786) to the last low. For more information on the triggers I like to use, please refer to this prior informational piece on the subject (available to ETF Profits subscribers).
Personally, I like to use options for the trade. Your initial stop on the trade would have been below the March 15 low at $180.30.
Incidentally, if you would have used the "aggressive" 15-minute trigger chart, you would have been stopped out once after an entry against the March 13 low. Following that, the second entry on the 15-minute chart would have played out nicely.
Initially we saw a minor rally as the stock held above key support, followed by a beautiful thrust upward on March 20, when two of our upside price targets were met. This is where most of the traders in the setup booked profits. Target 1 came in at the 1.272 Fibonacci extension of the March 8 high to the March 15 low at $190.58. Target 2 came in at the 1.618 extension of the same swing at $193.37. So far we've seen a $14.02 rise from the March 15 low.
Of course, this is the way we would always like our trade setups to play out, as it's a textbook setup. But, when it does not, the risk is nonetheless clearly defined -- as in this case, with our initial stops below the March 15 low. For another example, example, while the Amazon setup was almost perfect, that same day another one cropped up in Joy Global (JOY), against its $76.50 low. If anyone had happened to take this setup, they'd have been stopped out with a small loss, relative to what the potential was on that trade. The lesson: you win some, you lose some. Keep your losers small and let those winners ride!
