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Day Trading Tactics (Archived)

Day Trading the Afternoon Rally

Day trading the pauses in a momentum rally on daily charts is a popular strategy. These pauses are typically only one to three days long and give the momentum stock a chance to rest. Daily candlestick charts are a convenient tool to locate potential setups to day trade.

The daily candlestick chart for Sears Holdings Corp. NASDAQ:SHLD is shown below in Chart 1.

Chart 1. Daily candle chart for SHLD

Candle daily Chart SHLD

The daily chart for SHLD shows a stock that is in a momentum driven rally. The lows of most days is higher than the preceding day's lows and the stock is in a good uptrend with 50-day SMA (simple moving average) sloping upwards. The stock pauses for three days while it consolidates its gains. The highs have been declining since its rally high four days ago and SHLD formed a Hammer reversal signal indicating that the stock may continue its rally.

Should SHLD trade above the setup day (Hammer candle) day's high at 58.50 then an entry can be considered. A 5-minute intraday bar chart for SHLD is shown below.

Chart 2. Intraday 5-min bar chart for SHLD

intraday Chart SHLD

From the intraday chart for SHLD, the stock trades above the setup day's high of 58.50 and forms a broad ascending triangle until the afternoon with resistance at 58.90. A good entry point is a breakout from the ascending triangle.

A buy order would likely be filled around 59.00. The stock after breaking out traded along the resistance level which it used as support and then rallied. The day trader has a second to enter once SHLD trades up from the resistance level with a likely entry of around 59.10

The risk-reward for the trade should be considered.

The risk is determined by the initial stop which can be placed at around 58.60. The reward can be determined by adding the height ascending triangle (58.90 - 57.95 = 0.95) to the triangle's resistance which gives a profit target of (58.90 + 0.95 = 59.85).

The risk-reward can now be determined.

Likely entry price of 59.00 and an initial stop of 58.60 with a Profit Target of 59.85 gives:

Profit = 59.85 - 59.00 = 9.85

Risk = 59.00 - 58.60 = 1.40

Risk reward ratio = 9.85 / 1.40 = 7.0

With a risk-reward ratio of 7.0 this is a very good trade to take even allowing for the fact that there is less than two hours until the market close. Stocks that break through resistance late in the day often lead to strong rallies.

Ascending Triangles usually do not lead to rallies much beyond the profit target and therefore it is generally a good idea to exit at the profit target. The trader can always use a trailing stop such as a 2nd low trailing stop.

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