As a dealer, calling market tops (or bottoms) is a troublesome and probably harmful factor to do. Calling a market prime on a basically robust inventory throughout a powerful uptrend might be a silly factor to do. However for swing merchants, exploiting such a commerce can usually be tempting, particularly when the technicals are flashing pink for an impending decline.

Final week, Coinbase’s (COIN) technicals gave a powerful sign {that a} pullback was imminent. Your entire state of affairs was specified by the article “Is Coinbase Inventory About to Crater? Here is One Strategy to Exploit It“. It seems this setup labored, however just for the primary goal.

Here is an replace on what occurred, plus a couple of phrases on managing threat.

CHART 1. DAILY CHART OF COINBASE ON MARCH 12. All indicators pointed to a possible pullback within the inventory’s worth.Chart supply: StockCharts.com. For academic functions.

On March 12, the next was obvious:

• The Relative Energy Index (RSI) learn “overbought.”
• The Chaikin Cash Stream (CMF) confirmed an excessive bearish divergence; shopping for stress gave option to promoting stress because it dropped under the zero line.
• The pin bar sample confirmed robust rejection from the underside, indicating substantial shopping for exercise and the potential for a number of cease losses proper beneath the bar.

This commerce aimed to exploit the cease loss space for a fast, short-term dip, through which the primary goal can be the center Bollinger Band (the second goal can be on the former resistance line).

The end result:

CHART 2. DAILY CHART OF COINBASE. First goal hit, however must you maintain for the second goal?

The chart exhibiting the end result above was zoomed in to offer a better view of what occurred.

On the day of the commerce entry, you would have estimated that the risk-to-return can be close to 1-to-1 (roughly) for the primary goal, which wasn’t a nasty ratio.

With a brief entry at $242.05, a cease loss at $271.65, and a goal materializing at $219.95, the ratio turned out to be 1.33 threat to a unit of 1 (or a threat of $29.60 for a return of $22.10). The quantity of your potential loss or achieve would rely in your place dimension (i.e., the variety of shares you traded).

The newest candlestick on the precise displays a powerful rally on the day of the FOMC rate of interest announcement. With the Fed holding charges regular and reaffirming three extra cuts this yr, the broader market jumped; COIN went together with it.

And whereas the CMF exhibits an uptick in shopping for stress because it strikes above the zero line, notice that the quantity continues to dwindle. The “shorts” who exited the commerce did so with an honest, albeit small, short-term achieve. Nonetheless, a couple of might have partially exited their positions, hoping to catch that second goal. In that case, market sentiment in response to the Fed’s newest resolution might or might not work of their favor within the coming days.

The Backside Line

General, shorting a powerful inventory based mostly on a technical studying can typically current a professional “imply reversion” alternative, which some swing merchants are more likely to reap the benefits of. On this case, COIN did revert to the imply as measured by the Bollinger Bands. And in the case of riskier short-term trades like this one, it is usually finest to intention for the lowest-hanging fruit, so to talk, to take what you possibly can. In any case, that is arguably what swing buying and selling is all about.

Disclaimer: This weblog is for academic functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your personal private and monetary scenario, or with out consulting a monetary skilled.