Using Inflection Points

A Playbook ExerciseBy Jake Huska

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Look at the longer timeframe (daily/weekly) to identify clear inflection points on the chart.

For an In Play stock that is gapping higher or lower, look at the post-market price action in relation to the longer term price levels.

The risk/reward can be heavily skewed in your favor near these inflection points.

Generally, the greater the range between these inflection points, the more risk you need to put on.

Strategy Description

SPY was fairly quiet. $169.50 had been prior resistance back in

mid September and had acted as support yesterday. Below $169.50, there was $169.

Above $170.20, $170.50-$170.65 was the next micro resistance zone.

Coming into today, SPY had been down 3 days in a row.

Big Picture — SPY

Big Picture — SPY 30 Minute Chart

Source: benzinga.com

◦ Red Hat has reported a second-quarter EPS of $0.35, beating the Street's estimate of $0.33 by $0.02. Earnings per share were up 25 percent from the same quarter in 2012. Red Hat's revenue came in at $374 million versus the Street estimate of $372.11 million. Sales were up 16 percent year-over-year.

Intraday Fundamentals

Looking at the daily chart, $47 was a potential level of support.

$45.50-$45.80 was an even bigger level on the daily.

1.20-1.50 range between these two inflection points, which should offer nice r/r opportunities.

Long-term Technicals

The above is a daily chart.

Long-term Technicals

The after-hours/pre-market action was bearish, as sellers were in control.

Stock was trading below the after-hours consolidation, indicating that sellers were in control on a short-term basis.

$48 acted as some resistance pre-market, so looking for shorts near the level made sense with a point of potential downside until the next support level.

Could walk into something bigger if there is a flush below $47 down towards the bigger support zone at $45.50-$45.80.

Short-term Technicals

RHT was relatively “clean” on the open with offers holding lower.

$47.70 held, then $47.50, which led to a quick flush below $47 of about 30 cents.

The stock was pretty choppy later in the day.

Reading The Tape

The above is a 1 minute chart.

Trade Management

I feel like I did a good job identifying the important inflection points, both on the longer- and shorter-term timeframe.

I believe I managed the trade well by covering 2/3 of my position into $47 as well as in front of $46.30 once I spotted some buying on the tape.

I think I did a good job later on when I reloaded on the short into the retracement and held it below $47, based on the trade idea of new lows.

Trade Review

I could’ve tried a bit more to short a small lot in the pre-market at $48 to be in a position of strength at $47.70.

I could’ve done a better job of adding to my short once it held lower at $47.50 on the open.

Trade Review

I would continue to use $47 as an inflection point. Perhaps they will spike it up on the open, but if it’s sold and clearly holding below $47, I’d look to initiate a short with the expectation of yesterday’s lows getting taken out. $45.50-$45.80 would be my “hopeful” cover zone.

Could look to the long side if it’s holding above $47 and takes out $47.50.

Trade Idea