Seeing a Two-Step Pattern

 | Sep 21, 2012 | 1:00 PM EDT
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I spy a two-step pattern in Cytec (CYT) telling me it might be ripe for an entry on the buy side. The larger pattern in this stock still looks constructive. The price is clearly above the 200- and 50-day simple moving averages and the larger general pattern still shows some higher highs and lows.

It's the short-term work that I'm not quite convinced about just yet. Within the context of a two-step pattern however, you will see a prior swing low taken out -- even though it may turn out to be a bullish two-step pattern! I realize this can be a little confusing to someone who is not familiar with these zig-zag patterns, but let me help you focus on what is most important here. Also, keep in mind that I am not going to step up to the plate unless I see a proper 30-minute buy trigger fire off in this case. (I had not seen one as of Thursday afternoon, Sept. 20.)

Here is what is important to me: I have a very healthy support decision coming up in this stock that we are currently testing at the $62.64-$64.43 area. This zone includes the coincidence of 12. Yes, that's 12 Fibonacci price relationships. For a typical Fibonacci price cluster setup, I only need to see the coincidence of three of these price relationships. Most of these support decisions are 100% (symmetry) projections of prior declines within the uptrend. The rest are either retracements of prior swings and there are actually two price extensions that are calculated from the Sept. 12 low to the Sept. 14 high. Keep in mind that just because there are 12 price relationships does not mean the support will definitely hold. What it does mean however is that it is a rather important price decision!

Besides the price support we are currently testing, I am also looking at the confluence of some timing cycles, which suggest that the odds for a low and reversal to back up are higher than usual. This is represented by the pink histogram in the chart below.

Cytec (CYT)
Source: Dynamic Trader

So this is the trade: If the price continues to hold above the $62.64-$64.43 area between now and this next week, I will look to buy if a 30-minute trigger fires off. Right now, if the most recent low remained intact the this trade starts to play out, I have a hurdle on the way up that comes in at $67.33-$68.17 and target 1 comes in at $71.65 if the two-step pattern starts to play out fully. (Please refer to the trades/triggers article.) If a new low is made into the zone instead, I would have to recalculate the hurdles and targets for you if it started to play out. The maximum stop on this setup can be defined below the $62.64 support cluster (maybe $0.30 below it).

If this same key zone is violated without a trigger firing off, I will stand aside and wait for the next setup instead.

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