This article first appeared on ETF Profits.
When I analyze a chart, the first thing I look at the pattern. Specifically, I determine whether it is a general pattern of higher highs and higher lows, which is bullish, or if it's a bearish pattern of lower lows and lower highs. I prefer to set up trend trades. They have a higher probability of success, since they entail going with the flow rather than trying to swim upstream. If a chart is trending sideways, I will typically avoid it.
Taking a look at Quest Diagnostics (DGX), I see a healthy bullish pattern on the daily chart. I also notice a recent decline, which I might consider for an entry in this stock. In an uptrending market I want to buy the pullbacks, rather than the breakouts, so I can keep the "edge" and keep my risk relatively low. This buy setup was identified by running quite a few 100% projections of prior declines in Quest Diagnostics that I then projected from the most recent high, made on Jan. 25.
Notice how many of the declines that are illustrated on the daily chart are similar in price. The ones that are more similar come in between $3.76 and $4.61. I also overlapped these projections with a couple of price retracements of the prior swing (the Jan. 19 low to the Jan. 25 high). This gave me three price zones to watch for possible support and buy entry. The first one came in between $57.38 and $57.70, and the second one was $56.68 to $57.09. The last area I would consider was $55.58.
Once I set up a trade zone, I watch to see if it is tested and holds. If it does hold, then I go down to a lower time frame chart to see if a "trigger" fires off. A trigger is basically what I need to see in order to consider placing a bet against a key level -- in this case, support. For more information on how I trigger myself into a trade setup, please refer to my prior informational piece on the subject.
A buy trigger has fired off in Quest Diagnostics on a 30-minute chart. The first key zone, at $57.38 to $57.70, was tested and it held. A low was made at $57.55, which was followed by a trigger around the $58.36 area. This is when I saw the break of a prior swing high on this lower time frame, confirmed by a moving average crossover.
If the price continues to hold above the $57.55 swing low, the initial upside target for this trade will come in at $62.54. You can place a stop either below the low that was made prior to the buy trigger ($57.55) or, if you want to give it a little more room, below the Jan. 19 swing low ($55.37). Even if you missed the first entry to this setup, you can still look at a pullback on an intraday chart for another entry. You could also take the next buy trigger using the risk parameters described above.
If all of the support above the Jan. 19 swing low is violated, then we'll know the trade is a bust and we'll move on to the next setup.