Small and mid-caps have been hit hard since late August, so rather than look for short opportunities after a large move, we’re looking for potential counter-trend trades on the long side. Today’s candidate is PTC India.
The stock has been trading to the downside since Q4 of last year, however, the weekly timeframe shows that structurally it’s rangebound at best. Recently prices retested their 2018 lows, undercut them, and quickly reversed, shifting the short-term reward/risk in favor of the bulls.
Click on chart to enlarge view.
Let’s take a look at the points that are relevant from the chart above.
- Our downside price target has been met.
- Prices undercut that price target and quickly reversed.
- Momentum diverged positively as prices made a new low.
- Prices are very extended from their mean (200-day moving average).
- Quick follow-through confirmed the supply/demand imbalance.
- Short interest in the stock (not required, but amplifies the move).
All of these characteristics combine to help create an entry where our risk is well-defined, probability of success is elevated, and reward/risk is skewed in our favor. We know going into it that counter-trend trades have a lower probability of success, but we’re willing to accept that when the reward relative to that risk is high enough (i.e. 10:1 or higher). That threshold is going to be different for every market participant based on their process.
With that said, if PTC India is above 67.90 we can be long with an upside objective near 85.25. Like the other trade ideas that originate from this type of setup, we’re likely to know very quickly whether or not this trade will work. If it doesn’t, we know where to get out with minimal losses and can move on to the next opportunity.
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