From Ryan Schofield at Trade with Precision:

When I search for trading opportunities in stocks, I always check the general market first. Focusing on US stocks (which are a perfect fit for me – check our Trading with a Busy Lifestyle webinar for details on the how and why) I turn to the S&P 500 (US SPX 500 - Cash) to get a better understanding of what the market is doing.

A brief look at both daily, weekly and monthly shows me that the market has put in lower lows and lower highs on all three timeframes. So I definitely want to focus on short trading opportunities for now.

Strong bullish market action, like we have seen since last Friday in New York, can lure traders into the market as buyers. While everybody is cheering for the bulls, the bears then sneak back into the picture and resume control and push the market back in the original direction to the downside. Let’s take a look at a stock that I have noticed this week that might provide an opportunity should such a bull trap be setting up.

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Alliance Data Systems Corp (Ticker symbol ADS) has already been in a downtrend when earnings hit on 28th of January and sent the stock gapping down further. This move down appears to be strong as hinted by convergence in MACD (strong) and RSI (little bit weaker). Looking at the weekly chart we can see that the stock has broken well below the most significant support levels and seems currently to be in no-man’s land.

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So while the overall picture supports a bearish setup, we are now looking for a good trade location to give us a trading opportunity with a favourable risk-reward-ratio.

The setup I am looking for is a pullback to about 217. Why this level? First, it is a Fibonacci Cluster (38.2% from the swing point high on 29th of December and 50% from the high if January 22nd). Second, a pullback to this level would be the bull trap kind of move we are looking for and, third, a pullback thus far will go a long way to fix the over extension we are seeing on the weekly chart while still being in the sell zone on our precision chart right now.

Once we get the pullback to the 217 level, I will be looking for a small bearish candle to trigger this setup for me.  Next earnings should be announced around the 22nd of April, so this gives us some time for the trade to work out.

As always: do your own due diligence and decide for yourself if this potential trade setup matches the criteria of your personal trade and risk management plan.

Happy trading!