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Trading the "Fat Pitch"

By Stephen R. Stewart
16 Jun 2006 at 11:38 AM EDT

TORONTO (FatPitches.com) -- It is always desirable to own the best instruments the markets have to offer, but it can be hard to pick a spot to buy. Gold and silver have been in huge bull markets the last 2 years. Recently, we had a big spike in prices followed by a fast hard correction (Chart 1).

Gold and silver are now flashing a “Fat Pitch” buy for those who like to “buy the dip.”

Let’s review!

This chart shows the run in gold and then the big spike. Finally it has a sharp correction and pulls back to the 200 day moving average (the 200 day moving average usually is a good place to buy on the dip.)

This chart shows the run in silver and then the big spike. Finally it has a sharp correction and pulls back to the 200 day moving average (the 200 day moving average usually is a good place to buy on the dip.)

Q: What is a “Fat Pitch” profile and how can I profit from it?

A: The "Fat Pitch" is a stock that has had a sharp sell-off in price and is now at point where we can successfully pick a trading bottom. It is usually a fast moving successful momentum stock that has had an extended run and has had a "hard" bout of profit taking occur. Sometimes the instrument trades back to new highs (which is the best "Fat Pitch") and sometimes it only bounces a few percentage points.

Whatever the success in percent return is, the lure of a "Fat Pitch" is its 99% accuracy at picking a tradable bottom. Yes, we will say it again - a 99% accuracy rate - and when we are wrong, your loss is very small (assuming you use are recommended stop loss).

Let’s explain in detail the set-up:

Using a daily chart, what is absolutely necessary is to have a combination of the following:

*
A RSI 30 Low with;
*
A Full Sto Low 20 with a crossover.

What will give us a higher degree of consistency and accuracy in the trade working is having the other technical indicators doing the following (these are not necessary but much preferred):

*
ULT below or near Low 30.
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Slow Sto Low 20 Below.
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Stock needs to be above its 200 day moving average.
*
We would prefer the stock has pulled back recently from its 2 year or all time high.

Q: What are the expectations of a “Fat Pitch”?

A: We would like the “Fat Pitch” to immediately trade to the upside, however, when picking bottoms a stock may sometimes flounder around for a few weeks before the change in price direction occurs. We have seen it take as much as 8 weeks before the upside move comes, but one thing we can say with certainty, there will eventually be an upward change in price direction with almost very little if any more downside in price.

What we see is all of our indicators hitting their lows all at the same time. This a great place to go long because the risk to reward ratio for a successful profit is at its maximum.

What we see is all of our indicators hitting their lows all at the same time. This a great place to go long because the risk to reward ratio for a successful profit is at its maximum.

Copyright © Fatpitches.com 2006

Stephen R. Stewart is Editor, Fatpitches.com (A division of Insight Equity Research Group).

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