Backgrounder on my LR Trade
Trade Objective: Buy on breakout of Darvas box above 9.32. Sell at target price based on increment if there is sign of weakness.
Reasons for buying:
1) After bouncing off 61.8 % fibo retracement, it broke out of its box.
2) After failing to break through 38.2% fibo level, it retested the top box and bounced.
3) An RSI bullish divergence was spotted from June 30, 2015.
I used the break of the initial Darvas box as a signal to buy. Therefore, I also used its failure to break its last box as a signal to sell.
I computed for increments of each box as a guide to the target prices of the next box.
On the final box (e), the target price was 10.96 (10.44 + .50 ). On July 27, the price reached a high of 10.82. This is short of the target of 10.96.
Upon establishing that high for the day as of 9:44 am , I computed for the 50 line for the day’s box — 50-line = (10.82+ 10.44)/2= 10.63. I used 10.63 as my guide for the day , assuming that 10.82 will not be broken. If the price stays above the 50 line for the day, then it is strong and a continuation is likely the next day. If it is broken, I will take profits.
The price started to break down from 10.63 at 11:16 am. I saw that as a sign of weakness. So I double checked with the minutes chart to see if the price breakdown is supported by the RSI. I realized that there had been a bearish divergence within 15 minutes of the open and the current cycle is a bearish convergence.
The price also breached SMA 50 on the 4 minute chart.
In addition, the high for the day , 10.82, was already 61.8% reverse fibonacci level, a tough level to break.
Reasons for selling:
1) Broke below the day’s 50-line
2) Price breakdown and SMA crossover on the 4 minute chart
3) Unable to penetrate 61.8% reverse Fibonacci level.
At the end of the day, the price dropped further to 10.38. If I held the stock until the end of the day, I still would have sold because the current box breached the top box of the previous box.