Daily Countertrend

Daily countertrends are stocks currently in an uptrend with strong fundamentals but, have made a move counter to the trend. They have become oversold on the pullback and closed below the lower Bollinger Band. This indicates the stock is in a strong up trend, but has pulled back from recent highs and is expected to resume the trend. This is a trend following strategy that is typically a short term hold lasting days to weeks. Since it pulled back and closed below the Bollinger Bands, it could also signal the uptrend is coming to an end. Therefore, it is not a long term hold. If it does resume the uptrend, it would then most likely be a candidate for the daily breakout strategy to re-enter the stock after the countertrend trade has ended.

Criteria:

  1. SPY 50DMA > SPY 200DMA at the beginning of the trading week
  2. Daily Countertrend screener
  3. The screener will find stocks which are oversold per its RSI, but a daily chart will need to be used to verify that the price has close below the lower Bollinger Band. The band uses the 20DMA with a standard deviation of 2.
  4. Know when earnings, or any other significant event, will be released.

Trade Entry:

  • If earnings, or any other significant event, will be released within 3 to 4 weeks of purchase, do not trade. (optional)
  • Use a 2x ATR to determine stop loss and position sizing.
  • The risk will not be more than 1% of account value
  • The dollar amount to purchase will not be more than 10% of account value
  • Set limit buy order at the previous closing price, or above if the technical show a strong open is likely for the next day

Trade Maintenance:

  • Maintain the 2x ATR stop below the purchase price, do not trail it.

Trade Exit:

  • If earnings, or any other significant event, is to be released, exit the trade before then
  • If the stock’s 50DMA crosses back below the 200DMA
  • If the day closes below the stop price, sell the next morning
  • If the price is up 3x ATR from the purchase price. Close the trade and take the profits