Trade Entries
Tonight we talked about some of my option trade entries on different stocks. One of the more common themes for a trade entry was illustrated by a trade into Southwest Airlines, symbol LUV. You can refer to a snapshot of the chart below from StockCharts.com.
The setup of the chart is using 3 commonly used indicators with their default parameters. The indicators are the RSI, MACD, and Slow Stochastics. Three simple moving averages are used: the 50 (blue line), 20 (red line), and 7 (green line). I am looking at the 50 as a long term trend, the 20 as a medium trend, and the 7 as a short term trend.
This stock had been in good strong up trend since last September. It then flattened, developing a strong resistance about $24.50. After a drop in mid-April, LUV started to consolidate and form an ascending triangle pattern. The key sign for this pattern is a break through resistance. That break occurred on May 12th. Based on the widest point of the pattern, we would expect a $2 move to a price of about $26.50.
All moving averages were heading up. The stock was coming off the 7 day moving average. The RSI was above 50 with a general upward trend. The same is true with the MACD. The Slow Stochastics had already crossed and was climbing. All three indicators had been showing recent strength, but the key reason for an entry was the break through the resistance, after a consolidating period from a strong performing stock. If the original entry was missed, another entry was possible after a pullback to the new support at the $24.50 level.
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