My main focus the past two weeks has been to trade early morning reversals, specifically on big gap downs. It's not ideal for everyone, but for intraday scalps, it is my weapon of choice lately with a fairly high degree of success.
Yesterday, Fossil Group (FOSL) fit that bill with the combination of disappointing earnings news along with concerns about competition from Apple (AAPL). This one fit right into the patterns I've discussed recently, triggering around 10:30 a.m. ET. From there, the stock bounced quickly; however, the bounce did not hold for long, but offered buyers plenty of time to scale out for at least a small profit. But what if you missed that first entry?
I'll say upfront I find it harder to play these later in the day, but there are still setups worth considering when the right elements exist. They did on Fossil, so the chart outlines a fairly "perfect" chart as a map to follow. When it comes to the afternoon setups, I want perfect charts, so this is the roadmap I'm looking for to make a trade.
First, when it comes to price, I want to see a very similar setup as we see in the morning. Basically, I want a red five-minute bar closing at the lows, followed by a green five-minute bar closing near or at the highs. Ideally, in the afternoon, those bars will be at or slightly above the lows from earlier in the day. New lows at that point become worrisome, as your stop may be more vulnerable. The setup on FOSL gives us an extra little support level at that afternoon low in addition to the morning low, which I see as an increase in the chance of success on the trade.
Again, I'm looking for specific crosses on the trade. In this case, I still want to see a push on the RSI, but unlike the morning where I want to see it go over 30, now I want to see it over 50. We want to see some strength rather than just a relief rally. The same can be said about the slow stochastics cross. I prefer to see the cross occur above 50 rather than in the sub-20 range like we expect to see early in the morning. Lastly, a moving-average cross along with a bullish cross in the Vortex Indicators is just icing on the cake. I prefer to see those, but they aren't absolutely necessary.
Now, we have a clearly defined risk in the $1 to $1.30 range, depending on exactly where you enter the trade. I will then ride the trade as long as I don't see a bearish cross in the stochastics with the RSI under 50 or two five-minute bar closes under the 13 period moving average. I do not carry these trades overnight. I like them, because they are simple to manage after entry and define risk rather well while allowing for unlimited reward.