This time I share a directional leverage trade as an oversold and less often overbought rebound trade that is a longer-term play over several weeks to 3-4 months or more. This trade is most often on sector and index ETFs. An easy to manage trade without close supervision that allows one to focus on other trades/work while in the trade. Monitor daily at close.
- IDENTIFY SETUP EDGE: Using a weekly or daily chart I am looking for a momentum squeeze where two indicators are converging indicating extreme overbuying or overselling conditions. The weekly trade may only happen once a year while the daily happens more often. Here we use the madness of the crowds to our advantage. The trade will often develop on hourly charts before daily and weekly charts. You will have either a PPO or MACD indicator on top of an ADI on the bottom. You want to see the moving indicators approach each other like shown here at A where the above MACD line and below blue DMI line reach toward each other and suddenly pull away:
b. ENTRY SIGNAL: +DI green line crosses -DI red line and then the ADX line itself. (Green circle, B)
c. TRADE EXECUTION: For weekly trades you want to exit the trade with 30 days left on the trade so go well beyond the date you want to exit. Using ITM options with a .70 delta (≤ 30% extrinsic(time) premium value) or better 2-3 months out or more. The amount of the trade/risk is based on my account size, number of edges, technicals and my confidence levels after full analysis. As this takes time to play out you can scale into the trade primarily on down days for Calls, and up days for Puts over a maximum of three-five days to reach your full position size.
d. RISK MANAGEMENT/STOP EXIT: If the MACD lines hesitate and wobble before crossing over on a momentum run it is okay. If it falters and loses momentum it’s time to exit this trade and move on. These trades are more reliable in a trending sector which is why sector and index ETF’s and are the best route versus individual equities. There is almost always a trending sector within a flat market. When a sector ship is moving it’s hard to stop a moving freight liner. I like to set a time limit for the trade to move in my direction after I have a full position, usually within 10-14 days, or I exit.
e. TARGET EXIT: Set profit alert at 50% premium gain upon entry and exit 25-50 % here, allow the remainder to run. You do not need to have a target to get out, but an indicator it is time to do so. When your MACD/PPO line crosses back its signal line is a good sign your momentum is fading and time to take profits. Use Fib extensions or resistance trend lines to mark your projections. Always exit position before earnings are released. If equity is in a squeeze also manage exit with TTM trend bars to gain full benefit of extended profits.
Summary.
- The MACD and ADX lines approach for a kiss. A
- The MACD lines cross and the ADX lines push away.
- The lines continue to move away from each other.
- +DI crosses -DI line and then the ADX line itself- BUY SIGNAL B
- MACD may wobble and then both the MACD and ADX move together in the same direction with momentum. C
- Exit at least some positions when MACD lines cross again. D
- If the MACD signal line crosses again in a positive momentum and the ADX accelerates ride this horse onward.
Scans for the trade setup can include stocks in oversold or overbought status using CCI, RSI etc.
EXAMPLE of The Momentum Rebound Trade
Here we have a daily chart of the real estate sector ETF, XLRE, in a setup that jumped from an entry price of $34 to an exit above $40 in just 6 weeks before exiting at D. Note the wobble in the MACD lines as they hesitated before taking off.
Enuf said.