Headlong Into Monster Beverage

 | Oct 16, 2013 | 9:00 AM EDT  | Comments
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Stock quotes in this article:

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Today I'm going to talk about a countertrend trade in Monster Beverage (MNST). Typically I avoid such trades unless I'm seeing very clear Fibonacci time and price parameters that suggest a termination of a move. Beyond that, I also need to see a signal on a lower-time-frame chart that tells me that it is worth placing a bet via options.

For Monster, all of these factors are present.  

First of all, as a reminder, when you're talking about the trend of a stock, it all depends on the time frame you are looking at. For example, a daily chart may have a bearish pattern, even as the 30-minute chart of the same stock may be considered bullish. Both assessments could be right simultaneously.

There are also a couple of different ways to define trend. Most of the technicians I know observe where a stock is relative to some key moving averages. They also look at the pattern of the stock. By "pattern," I mean either a sequence of lower lows and lower highs, or higher highs and higher lows -- typically considered bearish and bullish, respectively.

Monster Beverage (MNST) -- Daily
Source: Dynamic Trader

If we take a look at the Monster daily chart in particular, we'll see that the stock has put in a bearish pattern of lower lows and highs since the Aug. 9 high. Also, at that time the stock tested my key support level, as illustrated on the daily chart. The price was below the 200- and 50-day simple moving averages, and at that time the positioning of the five- and 13-day exponential moving averages still favored the bears.

So given a bearish daily pattern, and bearish placement of the moving-average lines, could we look at a countertrend buy setup in Monster?

First, note that we saw a healthy price cluster of support on the daily chart -- between $49.82 and $51.45 -- that included Fibonacci price extensions. As a general rule, many moves tend to terminate in such clusters. I also saw a confluence of Fibonacci timing cycles that came due between Oct. 7 and Oct. 10. The recent low was made on Oct. 7, directly within this price support cluster.

Finally, there was also a trigger, or a reason to place a bet against this zone, with the risk defined below the recent low made on Oct. 7. So far the stock has rallied $4.61 off the time-and-price low, and Monster is currently facing a hurdle at the $55.84-to-$57.12 area. Now, if you are currently long Monster, it's time to tighten stops -- because if the stock is going to fail, it will likely do so against the current price area. However, if the shares can clear this same key resistance level, the vote would be for a continued rally, with the $70.19 area as a potential first target.

Actually, if Monster can clear the key resistance hurdle, as well as take out the $58.74 swing high, the odds will increase considerably for a continued rally.

There are a couple of things you can do here. You can either look at buying a pullback to the Oct. 7 low and place risk below that level, or you can wait for a breakout above key resistance and buy the next pullback. Ultimately, if the Oct. 7 low remains intact, I'll shoot for a target at $70.19. I will consider myself wrong in this if this key low is violated at $51.15.

As an addendum, below is a 30-minute trigger chart of Monster. This should give you an example of what I look for when I'm attempting to determine whether to enter a stock against a key price zone.

Monster Beverage (MNST) -- 30-Minute
Source: Dynamic Trader

For more information on trade triggers, please refer here.

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