I recently wrote up a guide to help you use my technical analysis to your benefit. Now let's apply those rules as we take a look at a current setup in the stock Johnson & Johnson (JNJ). To reiterate, my basic formula for making money is setup + trigger = trade entry -- and then, of course, trade management.
First, due to this stock's general pattern of higher highs and higher lows, this initial setup was on the buy side. It also helped that the pivotal Nov. 16 low in the S&P 500 futures was intact, as this would likewise vote for some higher prices in the future. The price was also above the 200- and 50-day simple moving averages, and it had recently seen its five-day exponential moving average cross above the 13-day EMA on the daily chart -- another bullish development.
Now, the initial trade setup was a price-cluster zone that contained the coincidence of at least three Fibonacci price relationships coming together within a relatively tight range. The general zone I was watching ranged from $67.23 to 68.74.
Another reason I was interested in this stock had a lot to do with what I like to call time symmetry. This concept, whether it is related to price or timing, is "similarity or equality" when comparing swings in the same direction. In this case, I was comparing the timing of prior declines, as illustrated on the daily chart of J&J below.
Note that quite a few declining swings lasted between 17 and 21 trading days. The most recent swing, into the Nov. 16 low, lasted for 19 trading days -- very similar to these prior pullbacks. In the past we've seen resumptions of rallies after such similarly timed declines. This setup was also in the direction of the trend -- and that, along with the timing parameters, is what had put J&J on my radar in the first place.
Now, this setup has already triggered some initial buy entries against the Nov. 16 low, but there is a reason I'm showing this to you. First we'll look at a couple of obvious buy triggers on the 30-minute chart of this stock, and then we will talk about secondary entries. In other words, you may have missed the initial entry of a trade setup, but you can still get involved at a later date as long as there is still room to make some money.
In the article linked above, I talk about using a 15- or 30-minute chart for a swing trade entry. For J&J, I'm using the 30-minute chart.
The first trigger I see here came in at Nov. 19. That's when the stock took out a prior swing high and saw the moving-average crossover to the upside. Another solid trigger came later in the month, on Nov. 28, on a retest of the first price-cluster low. Both times, the initial stop could have been placed below the Nov. 16 low at $68.51, or the low could have been made into the cluster prior to the trigger firing off.
So far, J&J has rallied from $68.51 to as high as $70.52.
The above-linked piece also discussed price targets. For any of my trend-trade setups, my targets are always calculated by multiplying the swing into the setup zone by the Fibonacci figures of 1.272, 1.618 and then 2.618. This means target 1 for a rally in J&J comes in at $73.89. Target 2 comes in at $75.35, and Target 3 is $79.58. (These are illustrated on the first chart.)
Since the stock is nowhere near these upside targets as of yet, and since the upside potential is still healthy, what we want to do now is to look for a secondary entry into this trade setup. We can do this by looking to buy a pullback to the Nov. 16 low. The general rule of thumb is to look at entering on a pullback of anywhere from the 50% to 0.786 retracement of the prior swing. There are other ways to refine an entry, using the lower-time-frame work, though I will save that discussion for another article. There are also other trigger-entry methods that you could use along with my trade setups.
Bottom line: I like the long side of J&J as long as price remains above the Nov. 16 swing low. If that low is taken out, I'll have been proven wrong in the trade.
For more information about trades and triggers, please refer here.