Stockhaven Blog  

I’m introducing a new feature to my daily commentary that I will try to do once a week. The point of this new feature will be to emphasize how important preparation is when it comes to successful trading. Each night, in my trade journal, I write down a trading plan for the particular stock I want to trade the next day. I am going to share my preparation with all of you in an effort to show everyone what I pay attention to and how I react accordingly. 

3/21/12 – (The date I plan on executing this plan is always in the top left hand corner of my journal so I can go back and review my preparation days or weeks later if I want to)

AMZN ($192.33 – Tuesday’s close) – bullish bias

support:

1. $191.86 (this level marks the lowest point AMZN traded the last 2 hours of the day, thus it is my “most recent low”)
2. $190-$190.70 (this range marks an area of resistance for AMZN from 12:55 pm – 1:25 pm on Tuesday… therefore I want to see if this prior resistance becomes support)
3. $189.25 (this level marks the price AMZN pulled back to and bounced off after an uninterrupted up move from 12:21 pm – 12:54 pm where the price rose from $186-$190)
4. $187.30-$187.60 (this range marks an area of price congestion that occurred during the move outlined in support 3)
5. $186.50-$186.70 (This range represents AMZN’s high of day from 3/19 and when it was broken is when AMZN really started to move on 3/20)

resistance:

1. $192.50-$192.85 (this range marked AMZN’s highs for the last 15 minutes of the day on 3/20 as well as lows from earlier in the day after it extended past $190)
2. $193.50-$194 (this range marks an area of price congestion for AMZN the last 2 hours of the day on 3/20)
3. $194.41 (this level marks AMZN high of day on 3/20… aka: prior days high)
4. $195.63 (AMZN’s next most recent high after resistance 3 from 1/31/12.. also of note is that AMZN closed that day at $194.44 which adds more relevance to resistance 3)
5. $196.50 (AMZN’s next most recent high after resistance 4 from 1/27/12)

Observation: 3/20, marked the highest volume on an up move for AMZN since 1/31/12. The difference between then and now is the most recent 6 week range. Going into 1/31/12 AMZN had traded in a 6 week range of $166.97-$196.50 or 15%-17%. Going into 3/20/12 AMZN had traded in a 6 week range of $175.14-$193.57 or 9.5%-10.5%.

thesis: Due to AMZN spending the last 6 weeks in an apparently tight range and then breaking above the top end of this range on 3/20 I have a bullish bias. Supporting my bias is that on 3/20 AMZN traded 8.9 million shares vs a 10 day volume average of 4.6 million. I take this as a bullish sign because instead of sellers coming in near the top end of AMZN’s most recent range 6 week range and pushing shares lower, buyers instead came in and pushed them higher… i.e. at a level where one would typically expect supply to outweigh demand, demand in fact outweighed supply. Therefore, I am led to believe that moving forward, this could be the start of a new trend that sees enough demand come into AMZN to move it past existing supply (i.e. resistance levels)

required volume criteria:

1. 3 minute volume @ open > (greater than) 120,000 – 160,000 shares is bullish if price is increasing. Dips that follow on < (less than) 60,000-90,000 shares are bullish if they hold above supports 1 or 2 or 3/20 close—-bearish scenario is volume > 100,000 – 120,000 shares on breakdowns below supports 1, 2, and 3
2. 15 minute volume @ open > 400,000-550,000 shares is bullish if price is increasing. Dips that follow on < 275,000-375,000 shares are bullish if they hold above supports 1 or 2 or 3/20 close—-bearish scenario is volume > 400,000 shares on breakdowns below supports 1, 2, and 3
3. 60 minute volume needs up candle on volume > 1.5 million shares to signal move towards 5 (first 60 minute candle of day only represents 30 minutes so up candle on volume > 1 million – 1.2 million shares is bullish in this event). Dips on < 1.2 million – 1.4 million shares are bullish if they hold supports 1 or 2 or 3/20 close—-bearish scenario is volume > 1.5 million shares on breakdowns below supports 1, 2, and 3

plan: I want to play the 190 or 195 calls because they were the most liquid on 3/20 and they also represent the nearest in the money call and nearest out of the money call. I will enter one of these calls strikes in AMZN near support 1 or 2 or 3 on matching volume criteria or a breakout above resistance 1 on matching volume criteria. Due to the huge move AMZN made on 3/20 once it broke its hod from 3/19 I will not wait to buy the first pullback after a breakout above resistance 1. Why not? Because if the price action on 3/20 is any indication, there may not be much of a pullback after the breakout.

target: If AMZN allows me to enter a trade based on my plan then I will target a move to resistance 5 as long as the volume criteria I am looking for is existent.

Adjustment: If AMZN breaks resistance 5 then all systems are go for a test of $200 so I will stay in the trade with at least 35% of my position to gain exposure to more potential upside. If AZMN fails to hold supports 1 or 2 or 3 then I will not enter a bullish trade today. My reasoning is that there is too much of a gap between support 3 and 4 and a breakdown below 3 would signal to me that AMZN may just need to consolidate today and the upside is limited. Instead, I will reevaluate AMZN after the close and come up with support, resistance, observation(s), thesis, plan, and target.

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The bottom line is, the best traders make their money when the market is closed. Furthermore, they don’t think about what to do with a stock, they react to what a stock is doing. While spending 1-2 hours a night to detail a full trading journal like I have above may not sound like fun, the profits can be immensely rewarding. Best of all, now I can wake up ready to go. I don’t need to think about anything, I am ready to react (or not react) to whatever AMZN throws my way.

-Stockhaven

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