10.02.2022
RTM, the S&P 500 Equal Weight Materials ETF, might offer us ride down to its 2018 highs. Only time will tell if Mr. Market and Madonna agree. Read on...
INTRODUCTION
Starting with a weekly chart, on the right side of the page we see evidence of a trend change. This is marked using a red arrow. It shows us that price peaked in March, made a lower-low in July, a higher-low August, and has now broken below July’s low. Looking left, the price of $119 is a previous level of resistance that may potentially turn into support. It also happens to be the confluence of the 2018 peak and the Volume-Weighted Average Price (AVWAP) anchored to the 2011 low. Note the 2016 AVWAP in the middle.
RTM Weekly. Click to enlarge.
Moving to a daily chart below, we see the year-long trading range and then that downtrend. The thing that stands out is the open gap, marked with a dashed line. One side can argue, do not sell here; Price has fallen too-far too-fast so get long. The other side can argue, this is not setting up an island-reversal or some form of mean-reversion; Instead, price is ready to flush lower so get short. Since both directional scenarios are possible, assuming price does not decide to move sideways, entering with a bias towards trend continuation and risk-control makes sense.
RTM Daily. Click to enlarge.
THE TRADE DETAILS
Zooming in, a stop at $148.50 is more than halfway up and into the black candle prior to the gap. If we expect price to immediately continue lower, then closing above this level will invalidate that idea, at least temporarily. With the target of $119, our reward to risk ratio is a very attractive 3.9 to 1. With Wilder’s 10-day Average True Range at 3.78, this stop is a respectable, but close, 1.58 times away from Friday's close, our idealized entry price.
Enter: $142.49.
Stop: $148.50. +6.01. 1.58x ATR10.
Target: $119. -23.49.
Reward/Risk: 3.9:1.
ATR10: 3.78.
RTM Trade Setup. Daily. Click to enlarge.
WHAT'S NEXT?
We watch and learn if price will continue lower, move sideways, or turn higher. Just before the second chorus of Madonna's Material Girl she sings, "Only boys who save their pennies make my rainy day." With that, she is reminding us that price is our guide and we must manage our risk accordingly. The timeframe here is 1 to 3 months.
As always, thank you for reading. This article is for educational and informational purposes only. Trade at your own risk. The author may or may not have a position in the securities mentioned. Read our full disclaimer here. Please reach out with any feedback or comments. I would love to know if you agree, disagree, or don't care at all. Louis@eastcoastcharts.com
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