Preemptive Break Out Idea for DirecTV, Not for the Faint-Hearted
Hi Fellow Risk Takers,
Here is an idea that is more complicated and may not be suitable for novice traders or the faint-hearted.
It is essentially a “Pre-emptive” Break Out idea and it requires guts and precision to execute.
(1) DirecTV (DTV) has been trading in an accelerated up trend line, from March 2013 to May 2014. During this period, price has risen from $47.50 to as high $88.00.
(2) After the accelerated rise in price mentioned in (1), price has been consolidating for 7 months between $83.50 and $87.50, with 10 Dec 2014 Closing price at $83.38.
During this period price has tested $83.50 support (Purple boxes) and sold off at around $87.50 resistance level.
The consolidation price action forms a sideways Rectangle chart pattern, with the current closing price closing slightly below the lower boundary of $83.50.
(Projection)
On a strict interpretation of technical trading theory, 11 Dec 2014 closing of price below the $83.38 is a breakout confirmation for a bearish move on the downside.
However I'd exercise my personal judgment that the rectangle consolidation will hold and eventually Break Out on the upside, for a continuation of the uptrend in (1).
Therefore the key idea is that current price level is now cheap to enter long DTV preemptively for an eventual Break Out.
(Execution)
Enter long only if price can trade and sustain above $84.00.
There are 3 probable scenarios after entering long above $84.00.
Here's how to handle each scenario.
(Scenario A)
Scenario A is the best case scenario where price heads to $87.50 once more, consolidates slightly and Break Out upwards.
Step 1: Enter long when price can trade and sustain above $84.00, Stop Loss below $82.00
Step 2: Next step will be to take 50% partial profit, when price trades around $87.00, and place your stop loss to breakeven level. This also means you are very unlikely to lose on this trade at this stage.
Step 3: Wait for price to Break Out above $88.50 and go back long the 50% long position that was closed in Step 2.
With 50% position entered at $84.00 in Step 1, combined with 50% position added above $88.50 in Step 2, you will have effectively built a long Break Out position with a net average price of $86.50. Also the $87.50 level will act as "protective shield" against retracements after the bullish breakout.
Step 4: Shift Stop Loss to Breakeven Level and take profit bit by bit as price trades higher above $90.00.
(Scenario B)
This is how you handle situation when price simply trades to around $87.50 and gets resisted.
Step 1: Enter long when price can trade and sustain above $84.00, Stop Loss below $82.00
Step 2: Next step will be to take 50% partial profit, when price trades around $87.00. At the same time, place your stop loss to breakeven level. This means you are very unlikely to lose on this trade at this stage.
Step 3: Will be to close the remaining 50% position at breakeven level when price drops back down from $87.00.
Step 4: Enjoy a cup of your favorite beverage with the bit of profit earned in Step 2.
(Scenario C)
This is the worst case scenario which will result in a loss.
Step 1: Enter long when price can trade and sustain above $84.00, Stop Loss below $82.00
Step 2: Close position at a loss when stop loss is triggered.
Step 3: Understand that this is simply the risk and cost of the trading business.
(Risk)
There are several possible routes that price can take and may cause undue stress if price does not go as planned. This may result in emotions taking over and not following through the steps prescribed.
There is a risk that this is actually a topping formation and price breaks out on the down side.
Also current price action is in consolidation phase and may drag sideways on and on deep into 2015 and beyond. Therefore much longer maturities are better suited, if you intend to trade this idea using EQ Options.
Who Dares, Wins
Like it, Share it, Follow it~
Here is an idea that is more complicated and may not be suitable for novice traders or the faint-hearted.
It is essentially a “Pre-emptive” Break Out idea and it requires guts and precision to execute.
(1) DirecTV (DTV) has been trading in an accelerated up trend line, from March 2013 to May 2014. During this period, price has risen from $47.50 to as high $88.00.
(2) After the accelerated rise in price mentioned in (1), price has been consolidating for 7 months between $83.50 and $87.50, with 10 Dec 2014 Closing price at $83.38.
During this period price has tested $83.50 support (Purple boxes) and sold off at around $87.50 resistance level.
The consolidation price action forms a sideways Rectangle chart pattern, with the current closing price closing slightly below the lower boundary of $83.50.
(Projection)
On a strict interpretation of technical trading theory, 11 Dec 2014 closing of price below the $83.38 is a breakout confirmation for a bearish move on the downside.
However I'd exercise my personal judgment that the rectangle consolidation will hold and eventually Break Out on the upside, for a continuation of the uptrend in (1).
Therefore the key idea is that current price level is now cheap to enter long DTV preemptively for an eventual Break Out.
(Execution)
Enter long only if price can trade and sustain above $84.00.
There are 3 probable scenarios after entering long above $84.00.
Here's how to handle each scenario.
(Scenario A)
Scenario A is the best case scenario where price heads to $87.50 once more, consolidates slightly and Break Out upwards.
Step 1: Enter long when price can trade and sustain above $84.00, Stop Loss below $82.00
Step 2: Next step will be to take 50% partial profit, when price trades around $87.00, and place your stop loss to breakeven level. This also means you are very unlikely to lose on this trade at this stage.
Step 3: Wait for price to Break Out above $88.50 and go back long the 50% long position that was closed in Step 2.
With 50% position entered at $84.00 in Step 1, combined with 50% position added above $88.50 in Step 2, you will have effectively built a long Break Out position with a net average price of $86.50. Also the $87.50 level will act as "protective shield" against retracements after the bullish breakout.
Step 4: Shift Stop Loss to Breakeven Level and take profit bit by bit as price trades higher above $90.00.
(Scenario B)
This is how you handle situation when price simply trades to around $87.50 and gets resisted.
Step 1: Enter long when price can trade and sustain above $84.00, Stop Loss below $82.00
Step 2: Next step will be to take 50% partial profit, when price trades around $87.00. At the same time, place your stop loss to breakeven level. This means you are very unlikely to lose on this trade at this stage.
Step 3: Will be to close the remaining 50% position at breakeven level when price drops back down from $87.00.
Step 4: Enjoy a cup of your favorite beverage with the bit of profit earned in Step 2.
(Scenario C)
This is the worst case scenario which will result in a loss.
Step 1: Enter long when price can trade and sustain above $84.00, Stop Loss below $82.00
Step 2: Close position at a loss when stop loss is triggered.
Step 3: Understand that this is simply the risk and cost of the trading business.
(Risk)
There are several possible routes that price can take and may cause undue stress if price does not go as planned. This may result in emotions taking over and not following through the steps prescribed.
There is a risk that this is actually a topping formation and price breaks out on the down side.
Also current price action is in consolidation phase and may drag sideways on and on deep into 2015 and beyond. Therefore much longer maturities are better suited, if you intend to trade this idea using EQ Options.
Who Dares, Wins
Like it, Share it, Follow it~
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