Swing Trader - NetApp Inc. (Public, NASDAQ:NTAP)

NTAP is forming a bull flag on the daily (Darvis Box on the 15 min. timeframe below) following last week's earnings gap. The earnings gap accompanied by the volume spike foreshadows higher prices. Swing traders can target full extension on the daily timeframe above when price successfully breaks the highs.



What is the Darvis Box?
Trading strategy developed by Nicholas Darvas in 1956-57. Look for stocks breaking out of a base on huge volume. After the BO, price consolidates in a very narrow range - Darvis box (price/volume contraction ahead of expansion). As price breaks out of the box, enter the trade. Darvis made $2M in approx 18 months using this simple strategy.

Technical Picture - New Recovery High

A mixed start on Tuesday with choppy base building persisting well into the afternoon before a late day run to fresh new 52-wk and recovery highs. Thus Monday's retest of the base was successful and we rally on. The lack of volume implies few bears ie. no short squeezes as the bulls party on.

Gap Trade - PRGO

PRGO opened with a wide gap and immediately took out the ORH. Volume = momentum on these wide gaps and since PRGO's volume is strong, we want to get in.

Since there's no identifiable chart pattern, move from 15 min. to 5 minute timeframe to find a suitable entry point. Price consolidated in a narrow range close to 5 EMA so I entered long. Place Fibs. from previous day - late day lows ie. beginning of last leg up - to ORH and target a Trader-X style extension.

As long as the stock continues to carve out higher highs and higher lows, we can be hopeful of further extensions. After exiting the initial trade, we wait to see how price consolidates. Price consolidates in a narrow range on low volume (price/volume contraction ahead of expansion).

Place buy stop order just above the highest point of the consolidation base after two pivots into the base. The third test of the base is the anticipated BO point as depicted on the two trades below.

Swing Trader

Swing Trading Rules:

• Look for stocks breaking out of bases or chart patterns on strong volume. Lots of stocks break out of bases and fail, so I want to stress the importance of strong volume on the BO bar. Strong volume means accumulation.
  
• Once the swing trade is underway, we need a follow through day to confirm a high probability of success. Ideally, the follow through day should close in upper half of the day's range with good relative volume. How long after the BO should we expect to see a follow through day? It depends on whether or not there is a wide gap accompanying the BO. A wide gap can take several sessions to consolidate.
  
• Identify a target using Fibonacci extensions. On a measured move basis, price should extend 100% of the depth of the base from low to high. The same goes for chart patterns.
  
• Manage the trade with the 6 day EMA (pastel blue on my charts below). If price breaches the 6DMA on a closing basis, exit the trade, otherwise stay in the trade until price approaches the target. Stops should be set with some wiggle room especially in consolidation zones.
  
• Scope out support/resistance zones including unfilled gaps as areas to take partial profits.
  

APKT, which we discussed back on February 24th, is a great example. The stock broke out of a lengthy base with a wide gap. It consolidated the gap by forming a perfect bull flag pattern. The follow through bar took well over a week - time for the flag to form. Price held the 6DMA on a closing basis throughout the ascent. Exit the trade as price approached the 100% FE of the flag pattern. Shortly after taking out the target, price formed a top and began to retrace.

I was late getting in this one - started buying as price consolidated between two blue line segments


AAPL gapped up on Friday after announcing scheduled launch of the ipad. The follow through day occurred on Tuesday, again with good volume. With separate accounts for swing and day trading, it makes sense to day trade these swing stocks as they propel higher.

RIMM broke out of a multi-month base on Monday following an analyst upgrade (HCPG pick from daily newsletter). Notice how the 100% FE of the base lines up perfectly with the gap fill.

MA was a failed bear flag pattern. Failed patterns usually result in fast moves in the opposite direction. I closed my position on the gap fill, but price is consolidating nicely so I will be ready to get back in.

I missed the GS trade, but it's a good example of a BO out of an ascending triangle. Also the bearish trendline has been broken.



BIDU broke out of a base in January, but failed to follow through and fell back down. A second gap BO in February which I didn't swing, reached full extension in early trade today.

N.B. These charts are from yesterday. I started writing this post last night, but got distracted.

Key Questions at Decision Point

Q1: What price and volume pattern(s) do you see in this chart?
Q2: How many times has this stock tested the intra-day support level (dashed line)?
Q3: Does current price action appear to be consolidating at support?
Q4: What would you expect to happen if it breaks support?
Q5: Can you see/define a tight stop level that might give a good reward-to-risk ratio?


EDIT: There are several good responses to the above questions in the comments. I agree with JTT that multiple timeframes help. In this case, the BIDU daily gave me confidence on the short side - it was testing an upside daily PP zone following a big gap down on Oct 27, 2009.

Review this FUQI chart from a June 30, 2009 post by Jamie where he stated - "Not sure what to call the FUQI setup other than inverse C&H. But if you see a big thrust higher, consolidation, and a big move back down, just draw in the lines and wait for the handle to form. [Target] approx. 100% measured move down...". Note that Jamie drew trendlines around the entire inverse C&H in FUQI whereas I have trendlines on the handle portion only. There are a lot of similarities.


So, what did I see in the BIDU intra-day chart? I saw a gap up, consolidation in the first 20 mins, a big thrust up with volume, small consolidation at the top, a big thrust down with volume - all of the preceding forms the inverted cup - then the handle started to form. The handle (lower volume) turned into a nice 3 PP base (inverted) with lower highs. The target was a 100% extension of the entire C&H pattern - about 6 grid line blocks. I exited half on either side of the target zone.


Today (Thursday 11/12), BIDU formed an IB on the daily - interesting.

Beware the Chop - Vacationing Traders

I just realized why there is so much chop in market of late. Many/most of the traders at trading blogs I follow are on vacation (including Jamie and Trader-X). Without those market movers, we are left with chop as shown on the SPY chart below. There is nothing remotely resembling a trend day over the last 5 days. The good news is that consolidation is either accumulation or distribution and will eventually lead to a nice expansion move (up/down?).
This morning VRTX hit my scanner based on %change from open and big volume. The daily had broken out above a trendline and the 15min setup a low-risk entry at the 30min ORH. It easily reached the 62% extension of the OR and went beyond. Even when the overall market is in chop mode, a strong setup in an individual stock can lead to a trend day (i.e., opens near the low/high and closes near the high/low).