My post on Tuesday outlined a possible reversal set up in Resmed which has continued to rally so the sell set up did not trigger. No harm done but no trading opportunity either.
My post today discusses a similar situation with latex manufacturer Ansell. This stock has risen sharply but the rally is now showing signs of weakening. A key difference between this and the Resmed chart is that, Ansell may stay in play as a potential reversal situation even if price rallies further before the set up is triggered.
Ansell has the potential to make a minor double top formation after the recent steep rally. This would be confirmed by price failing to move above Tuesday’s high and then breaking below the dashed support line.
The Bollinger Bands are confirming the possibility of a reversal set up by indicating weakening trend momentum. This is suggested where a trend peak made above the upper band is followed by a peak below the band after a significant uptrend.
An entry strategy approach that we often feature in the blog is to sell as soon as the 2nd peak below the upper band is confirmed by a close under the candle making that peak. As things currently stand, this is indicated by the arrow on the chart.
However, given how much the upper band has ballooned out at this stage, another possibility is that price could push quite a bit higher from here and still end up with a 2nd peak under the upper band indicating declining trend momentum. If this happens, the same approach to entry could apply i.e. sell on the first close below whatever candle makes the 2nd trend peak.
Indicator tools like the Bollinger Bands are really performing 2 functions in this situation
- Providing a logical basis for earlier entry to a possible double top compared to the standard strategy of selling after a break below the dashed support line
- Indicating that even if there is a further rally and a higher 2nd peak, something that may not look like a double top to the naked eye is in fact demonstrating the declining momentum and retesting type behaviour often associated with chart reversal patterns.
If there is a setup, the 14.30/14.40 zone may be a logical profit target . Here there is a gap waiting to be filled. The significance of this is added to by the 200 day moving average (green line) and middle Bollinger Band (20 day moving average and blue line) both being at around the same level