Odds Up for a Reversal

 | Jul 22, 2013 | 7:30 AM EDT
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I have identified a trade setup in CME Group (CME) via a "Fibonacci price cluster," which I define as a confluence of at least three Fibonacci price relationships within a relatively tight range. These clusters identify key support or resistance decisions in the market -- and, in this case, the cluster represents potential support. It includes the coincidence of at least eight Fibonacci price relationships between $72.42 and $73.80, with a focus of these price relationships coming in at the $73.27-to-$80 area.

For this setup, I also like that the price is above both the 200- and 50-day simple moving averages, and the stock's general bullish pattern of higher highs and higher lows. Both of these support a bullish case here.

CME (CME) -- Daily
Source: Dynamic Trader

Aside from the coincidence of price relationships, I'm also looking at a confluence of Fibonacci time cycles that are coming due between now and July 25. With timing cycles, I pay attention to the number of days (or bars) between key highs and lows on the chart, and then use this to gauge the probability that the stock is approaching a key level -- and a possible reversal. In other words, when I see that the current price move has lasted a similar number of days as prior swings in the same direction, I know the odds are higher than usual for a change in trend.

Since CME is currently trading lower into these cycles, I'm looking for a possible reversal back upward. Now all we need is a trade trigger that suggests it is worth picking up some shares (see more on that here).

CME Trade Setup Summary:

  • Buy cluster between $72.42 and $73.80
  • Stop loss: $1 below the cluster zone or $0.20 below the low made before the buy trigger fires off.
  • Target 1 is $80.99, while target 2 is $82.95.

Of course, all of this applies only if the July 19 low remains intact. Otherwise, these levels will need to be recalculated from the new low.

I would back off from the trade if the cluster were violated by more than $1.

For more information on trade triggers, please refer here

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