Video Tag Team: Define Your Risk

Carolyn: Now that I've given you a bit of a background in how to use my work in last week's article, I'd like to go over quite a few trade setups in the video below. These are not immediate entries, but zones that define risk, where we need to watch for our entries if the Fibonacci price parameters hold up. I've asked Henry Gambell, who trades with John Carter and the team at Trade the Markets, to share how he would typically enter the market using one of my setups.

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Henry: Sunday's open of the futures has provided solid follow through to last week's selling as the futures markets digest the weekend's downgrade. Standard & Poor's decision to bump the US credit rating to AA+ has sent the S&P futures to a low of 1161.50 after closing near 1200 on Friday. While the long-term repercussions of this will take years to unfold, we're currently trading off the lows and the next two days will be critical for swing traders. The fear in these markets is substantial, but moves by the Fed could generate a violent short covering rally and it's more important than ever define your risk and using Carolyn's work is one of my favorite ways to do it.

Having clearly defined price zones not only limits risk, but also allows a trader to have the potential for selling a top (or buying a bottom). While some of the zones noted in today's video will be violated at the open, others will begin to come into play. Amazon.com (AMZN) for example has a support zone between $186.13 and $182.37. If we trade in that zone I'll be looking for a period of consolidation and then ultimately a Squeeze. For support zones found on a daily I like using 60-minute Squeezes for entries. If you're fortunate enough to line up weekly support with a daily Squeeze these types of moves can be more powerful.

A recent example that worked well with Carolyn's work was in Disney (DIS). On July 21 the stock had a solid up day and Carolyn noted a .618 retracement on the daily chart at $41.48. This is the next key level of resistance I watch. The stock begins to consolidate then a few days later we have an hourly Squeeze form, a cross of the 8 and 21 EMA's and red TTM Trend Bars. This is a clear cut short signal and stops can be set at $41.48 giving a nice risk reward ratio. In the case of AMZN I would be looking for the exact same setup in the reverse, or bullish direction.

 
DIS Multi
Source: thinkorswim

At the time of publication, Carolyn Boroden, John Carter and Henry Gambell held no positions in the stocks or issues mentioned.

On Wednesday, August 17 at 6:00 p.m. EDT, TheStreet's Options Profits is hosting a webinar featuring Carolyn Boroden of Fibonacci Queen. Carolyn will show you her formula for success for picking stocks and options plays. Learn how to use Fibonacci Time and Price Analysis to identify high probability trade setups with defined risk and profit targets. The back half of the webinar will include an interactive, exciting Q&A session.

Please email: jill.malandrino@thestreet.com to secure a slot for the webinar as space is limited and for the link to the presentation.

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