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
- $191.86 (this level marks the lowest point AMZN traded the last 2 hours of the day, thus it is my “most recent low”)
- $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)
- $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)
- $187.30-$187.60 (this range marks an area of price congestion that occurred during the move outlined in support 3)
- $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)
- $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)
- $193.50-$194 (this range marks an area of price congestion for AMZN the last 2 hours of the day on 3/20)
- $194.41 (this level marks AMZN high of day on 3/20… aka: prior days high)
- $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)
- $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:
- 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
- 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
- 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.
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.
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