|MOS Breaks Upward From Descending Triangle|
- The standard "measure rule" in a descending triangle offers a profit target of the height of the triangle measured from the breakout point. That would give us a target of $33.38 with a stop at $24.39 (just below the bottom of the pattern.) Our entry would be $28.68, just above today's high. Now, an aggressive trader could place a stop around $26.99, which lowers the risk, but when I count 6 unique touches of that bottom trend-line, I'd be concerned that a pullback would easily take out that aggressive stop.
- That brings us to the reward vs risk ratio. The conservative stop only gives us a ratio of 1.08:1. The aggressive stop is much better with a ratio of 2.76:1, however as I said, I'm very concerned about the probability of that stop being taken out prematurely. The 1.08:1 ratio is a non-starter. The number of winning trades needed at that level are much higher than even a professional trader can consistently achieve.
- The profit target assumes we hit 100% of the estimate. That only occurs about 60% of the time, however, for a descending triangle breakout. A more realistic target would be $31.17 which is the 61.8% Fibonacci extension of the height of the triangle. That brings our ratio down to 0.57:1. There's also a weak resistance line at that level based on the high of the triangle. That increases the probability that we'd never hit the 100% estimate.
- Today's candle forms a double-top with an almost identical candle that formed June 23rd. In both cases, the price stalled at the 23.6% Fibonacci extension. A double top is a bearish pattern that, in this case, has a price target of $20.53. That, coincidentally enough, meets the 61.8% Fibonacci extension of a downward breakout from the triangle.
- The real killer for this trade, however, is an extremely strong resistance line at $26.91. That coincides with the 38.2% extension, and it's formed by a low on October 2, 2015, passes through the highs of the triangle pattern, and halted an advance on April 21, 2016 as well as June 7, 2016. It's a very strong area of resistance and, in all likelihood, the current breakout will stall at that level.
The other potential short that we will watch for is a break back into the pattern. At that point, if the market is similarly retracing, we can enter short and ride it at least to the bottom of the pattern, if not beyond. The way the overall stock market is surging this week, however, we'd only enter that play if the market itself pulls back and begins a downward retrace.
Remember, always stalk your trade. We're under no pressure to enter a position ahead of its time, and when we do commit capital we always want to do so when the odds are stacked in our favor. The moment those odds turn against us, the smart play is to revert to cash. When it comes to MOS, that's precisely what we will do. Cash is a position, and in this case, we believe it's the right one.