I'm currently looking at a trade setup in Sohu.com (SOHU). When I look at the daily chart, I like that the price is currently above the 200- and 50-day simple moving averages -- and that the five-day exponential moving average is above the 13-day EMA. These factors by themselves support a bullish scenario.
Zooming out to the bigger picture, if the Nov. 7 low remains intact, this stock will be showing some very healthy upside potential. The first major target, in fact, would come in at the $94.71 area.
Let's now dial down to a lower time frame chart in order to identify an area for a possible buy-side entry with extremely well-defined risk. On the 78-minute chart, the zones that are showing up tell me to take my buy signals as long as the price holds above the $67.72-to-$69.01 or $66.65-to-$67.27 areas. Stops can be placed below $65.64. Typically this is where I start looking at bullish options strategies.
Before you jump in, though, consider these notes on trade execution. Typically I will wait for a stock to test the support cluster, and I'll then see whether the price holds above the zone. If it does, I'll start watching for the buy triggers I like -- such as the eight-day EMA crossing above the 34-day EMA on a 15- or 30-minute chart.
But what if you like this stock and it never pulls back to the exact zone I've cited? The most important part of my work lies in defining risk, so as long as this aspect of your trading plan is solid, you can consider being a bit more aggressive. Of course, it is always important to create a trading plan that fits your personality type.
As always, if the above-mentioned key support zone is violated, I will back off the buy side of Sohu.com until further notice.
Happy trading, and happy New Year!
For more information on trade triggers, please refer here.