For predictability, use two timeframes, 1 sector, and 1 index.
Discussed in this article: Aetna Inc. ( $AET )
Let’s look at Aetna ( NYSE:AET ) real quick here. The market’s been a little volatile and it’s probably going to be more so going forward while we get through all that Washington DC stuff.
So what we really want to be doing is, number one, respect the volatility, or as I have been saying lately, we expect the expected because that’s why it’s expected, but we have to respect the unexpected. But anytime you can get a situation where you’ve got a well-defined entry, a well defined risk, that’s a stock that’s worth looking at.
First of all we’ll look at the on XLV ( NYSE:XLV ), it’s pulling back, it looks like it’s close to a good buy point here, a really good buy point at the 50-day moving average. So we’ve got some sector stuff going on. We’ll even zoom out a level and look at the overall market. It’s not the perfect buy point by any means, if this is going to continue we should even get a drift below the 50-day moving average.
But we do have what? Four days of a pullback, so we’ll say at least we’re not buying at the highs. The S&P is drifting lower, which makes it an okay deal. XLV ( NYSE:XLV ), the same thing, drifting lower, four days, its okay, right?
So now what are we doing? We’re looking for some predictability so we look at Aetna ( NYSE:AET ) and say, “Okay, this is been drifting lower for what? It’s been drifting lower for five days, five days, a pretty big pullback. Now we’ve got a well-defined support level here. So this is how you make a trade and you can apply this to just about any chart, at least on any chart that you should be trading.
When you see the whites of the bull’s eyes, right there, then you go ahead and buy the stock now. Take some stock and then just look to sell it when it gets up to 68.00 or so. It’s not a big trade, but it’s a trade. If you look at the intraday chart you can see it trailed off towards the end of the day.
So does that mean we’re going to rush out and buy it first thing in the morning? No, we look at this, we see what’s happening, it’s trickling along the lower Bollinger Band. So we see what’s happening on the daily chart, it’s pulling back, we see the open candle, that’s a good thing. Now we look at the 5-minute candle and we realize the open candle is because it opened up down here, traded clear up here and closed here, right? You get this.
So what we’re looking for now is, we’re zooming in, we’ve made our decision that we want to buy this stock. Now we’re down here on the 5-minute chart and what we want to see is this stock stop trading between the lower Bollinger Band and the middle Bollinger Band, which is just the 20-period moving average. Because when it was doing that, by definition it’s drifting down. When it’s doing that, in other words above the 20-day or 20-period moving average and below the upper Bollinger Band, it’s moving up.
So when we see the stock start to round out, and then start to do that, that’s when we pull the trigger, and I would rather buy here, than I would buy here, because I don’t know how far down this is going to go.