Sunday, November 10, 2013

Most profitable plays in my books - Enjoy guys,

After a great dilemma, I have decided to disclose how to spot the pending breakout plays, yes based on the requests i got for this. This is a setup for Big money in and Massive money out kinda plays.

I am not going to share my scan settings here, I am still in the process of fine tuning, may be in future. 

What you are going to see might seem crazy. I buy overbought conditions. No its not a mistake, yes I buy when a stock hits overbought conditions. Why? I will answer at the end of this article.

Note for day traders, Please for the love of your trading account, PLEASE PLEASE don’t use this strategy in 1,2,3,5,10,15,30 minutes, 1,2,3,4,8 hour charts, this is for those who cannot watch the market 8 hours (+5 hours of non-market hour trading).

Before we start this, I would want you guys to have a clear mathematical understanding on RSI and MACD. (I love Mathematics). Use all you learnt in your high school and understand it, because it is very very very very IMPORTANT!!!!, If you want to understand a stock movement in Overbought conditions.
First, Get a cup of coffee, because I don’t want you to fall asleep. Because I am going over few mathematical relationship between price movement and RSI (first) and Stochastic (second)

    RSI = 100 (-) --------
                   1 + RS

    RS = Average Gain / Average Loss (for any given time period)

If you are evaluating RSI for 14 (5min/30min/day/week/month, whatever it may be), first calculations for average gain and average loss are simple 14 period averages.
 First Average Gain = Sum of Gains over the past 14 periods / 14.
 First Average Loss = Sum of Losses over the past 14 periods / 14

The second, and subsequent, calculations are based on the prior averages and the current gain loss:
Average Gain = [(previous Average Gain) x 13 + current Gain] / 14.
Average Loss = [(previous Average Loss) x 13 + current Loss] / 14.
This smooths the curve. Lets just look at the simple approach.
Lets do a reverse analysis by assuming RSI is 70.
    70 = 100 - --------
                 1 + RS
    30 =    --------
             1 + RS

 1 + RS = 100/30 = 3.333

RS = 2.333
From what we see here, In order to hit RSI = 70, The stock has gained 2.333 (Avg gain/Avg loss) times in 14 days.
Putting it in lay man terms, one can say for every 10 (sellers) in the stocks, there are 23 (buyers), in the last 14 days taking long positions with equal $ amount and etc............ Which means, the mass crowd is interested in the stocks, and it will explode.
Who would not love this stock? Particular swing traders who loves buying a stock in oversold conditions (don't want to name the chat room, but definitely not Promotion Stock Secret) and wait for few months or years possibly to sell it at overbought, oops..... yes they sell it.

This is a little trick, not every average trader uses, but they always dream, capturing the greatest move. I did that too....

Are you guys ready? Lets get started, Sip the delicious coffee again.
For the ease of explanation I want to use TSLA stock as an example. (Of course fundamental traders, there are fundamental reason why this moved. Like Short squeeze, good earnings etc… ), but remember charts show all those in terms of volume and price movements.
First, define timeline for the stocks. Do not use daily, or anything lower, you will fail miserably, I want you guys to get this straight in your head. Never use this on daily chart. Never use this on daily chart. 
Never use this on daily chart or any lower timelines, until you get really comfortable with RSI overbought conditions, then start using it on daily to day trade. 
I cant stress this enough. Infact, I just started using this strategy, only for the reason it takes few months to take profits, and years to test this strategy, lol. 

SEVEN SUPER STEPS (SSS - SCAN and Execute), (oh btw, SSS - NYSE traded stocks hits trendline support, might have a 20% gain if played perfectly)
1)  Start your analysis with Weekly Chart.
2)  You need to look for stocks making new high on RSI in 52 weeks (1 year), or 104 weeks (2 years, best for explosive move, hard to find). Why in 52 weeks? Which tell me that the stock is absolutely loved by the masses recently over the year. The new high also indicates that the stock gained good momentum ofcourse is a momentum oscillator, (if you don't know whats momentum in a stock, seek a mentor right now).
3)  Look at MACD, if the MACD line is making new high in 1 or 2 year period.
Ok you spotted bunch of stocks, now what?
4)  Read the stories. You like it, then
5)  Look for the RSI to retrace to previous resistance or support points
a.  It could be trendlines or horizontal lines. (incase of TSLA it was horizontal).
6)  Look at the Candle, for Support and resistance
7)  Look for the SMA 50
All looks great, now wait for the accumulation zone.

Open Daily chart, Plot out support and resistances, also watch for RSI to hit oversold (lucky if this happens). Place your trade. And enjoy the ride. Easy to say, but Imagine locking up $10,000 for 200+ days, will a day trader do it? or will a swing trader do this? I have to confess! I rarely do it. YES, rarely. Smart way is swing trade such a stocks. JMO. 

Lets complete it with few examples

FORD did this in 2004,
FORD did it again

If you would have heard me mention about CSIQ quite a few times this year, Here is why?
--- Will add more charts if time permits for reference. I don't think i need to answer why I buy overbought?
ONVO - was the recent winner from this strategy. will post the chart this weekend, Unfortunately, trading view doesn't have price history during the time it spent on otc. May be some other time. 

I always wanted to keep this to myself, and just was not ready to share it. I think you guys can have it. There is ofcourse a lot hard work behind this, years of work and researches, please treat it as a highly valued material.

This article is not complete, this is really like a single page summary of "In Search of Lost Time", there are more than a few things you need to look for in such a trade. Like BB and KC squeeze conditions along with Momentum Indicators, Pivot squeezes / missed monthly or weekly or yearly (really rare, i would avoid if you find yearly pivot not tested in one year) pivot points, EMA ribbons reversal conditions, and few others secondary conditions. 

NOTE: This article is just the Basic and the most important aspect of this setup. Following only this on every ticker you find may turn out to get stopped out for a loss.
Any question or clarifications or suggestions. or email me or leave a comment.


udaycs said...

Posted NURO, two stocks to watch for any reversal plays. IPCI, UBNK. not saying they will reverse, but a possibility exist.

SBL said...

hello USCGears. You have some div areas that have a white background, but the font color is light gray, which makes it difficult to read the content.

Also, I notice you have a script that prevents a viewer from selecting text on the screen. Why is that?

udaycs said...

I will Fix this.

I am migrating this to a website soon.