Hands on the Steering Wheel

 | Aug 25, 2013 | 6:00 PM EDT
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What do I like about O'Reilly Automotive (ORLY)? Let's start with the fact that we are looking at a general bigger-picture pattern of higher highs and lows, as the current price action is above both the 200-day and 50-day simple moving averages. Beyond that, this chart is showing what I consider to be a classic bullish two-step pattern.

The two-step is one of the three trading setups I seek each day on whatever charts I analyze. It is essentially a zig-zag formation that corrects a prior trend swing, and it has to show me a minimum of three Fibonacci price relationships within a relatively tight range. In the case of O'Reilly's two-step pattern, we are actually looking at the coincidence of at least nine price relationships.

O'Reilly Automotive (ORLY) -- Daily I
Source: Dynamic Trader

Let's look at the daily chart for an illustration of these levels. The price-cluster zone that includes the two-step pattern resides between $119.45 and $121.73, and last week's Aug. 22 low came in at $121.51 -- directly within this zone. The chart above shows you the price cluster, along with the prior 100% projections of the prior declines that I also projected from the Aug. 5 high. Note that many moves will be similar to prior swings in a stock or index. That is why I watch them.

O'Reilly Automotive (ORLY) -- Daily II
Source: Dynamic Trader

We can label this next chart the "zig-zag," as the formation shown is correcting the prior rally swing. One of the price relationships that will be included in my two-step patterns is the 100% projection of the first swing of the formation.

In this case, I took 100% of the swing between the Aug. 5 high and the Aug. 9 low -- $6.39 -- and projected that from the Aug. 13 high. This gave us possible support around $121.36, within that pattern. Also note that, so far, the most recent low followed a $6.24 decline from the Aug. 13 high -- very similar to the $6.39 swing that took place earlier this month.

The $6.39 projection additionally overlapped a key retracement (50%) of a prior swing. Also within the price cluster is a 1.272 extension of that swing, which is needed to complete the collection of price relationships for the two-step pattern.

Bottom line: I'll remain interested in taking buy triggers in O'Reilly as long as the price holds above this key price cluster of support. My maximum risk can be defined below the low end of this cluster zone. If this setup does start to play out, the first target to shoot for will be the $130.34 area. I will exit the position if the price breaks below this key support level.

For more information on how to enter the stock via triggers, please see here.

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