(Bullish) Bottom Dead Cat Bounce Setup
This is a setup I am working on at the moment. It entails buying into a stock which has just rallied and entered overbought territory and subsequently pulled-back to find its new support. This doesn't predict the new support, only estimates it.
I do that by adding stocks to a watchlist which have just been headliners for a good surge to the upside. If I determine there is time to profit from further upside of course I will buy. But I am focusing on the pullback and following bounce thereafter. The stock has to feel right, it can't have just rallied because of some speculative chat group pumped the price up, it has to have verifiable backing as to why the PPS increased. Something like an acquisition, merger, financing, anything other than a pump and dump.
Entry:
I'm looking to buy the pullback after at least 3 daily red candles. I have to play around with this metric. After 3 red candles I'm looking for a formation of a green candle, or even a red + hollow candle (gapping down on the open but closing up). Pair the candle with a slight increase in (upward) volume and I have a comfortable entry point. I'm only looking to buy around support and hold the stock for 2-10+ trading sessions to take advantage of the bottom bounce. I really like stocks with an upward 50ma with 200ma below. PPS touching or at least trying to touch 20ma is icing on the cake but not necessity. Below either the 20 or 50ma on an uptrend is a very strong buy in my opinion.
This is a SWING play. I estimate the profit target to be less than the peak of the initial rally. That is almost always the case. It's hard to say exactly where to set your target. I believe this will vary a lot from one stock to the next so as a trader you will have to be familiar with the company and it's direction and any catalysts driving the price. After a nice upward move a good exit would be on a red candle as you can still take profits while having confirmation that a 'top' has probably been reached.
As always I'd like to keep my stops to -25% or less of my average profits and a mental 1:3 risk-reward ratio. Some bounces are larger than others. Some have continuations and some don't. I'm only interested in the first upward move as that is the most predictable and therefore consistent.
RECENT EXAMPLES: $HMNY $MGT $GEVO
Please comment with any critiques. As always a good look at the technicals is good due diligence along with any other research before placing your trades.
