Macquarie Group setup – Building Stocahstic and RSI into strategy.

This post continues the theme of discussing emerging trade set ups using the oscillator techniques outlined in the video I posted on 26th October

 

The Big Picture

My key reads from the weekly chart are:

• As long as price stays below the dashed overlap resistance line, the rally from the October 2011 may be only a correction of the last major swing down.
• The rally off the 2011 low has so far taken a 3 swing or ABC structure. This is consistent with a corrective move
• The potential peak at “C” has parked at a Fibonacci projection level. This projects that the length of the  B/C swing will be 127% of the of the A/B correction
• The slow stochastic is over bought, supporting short set ups in lower time frame charts (one of the techniques discussed in the oscillator video)
• Everything above points point to the potential for sell trades based on lower time frame charts if a good quality set up can be identified

MQG CFD – Weekly. Source: CMC Tracker

The Set Up

This set up uses RSI divergence on the daily chart.

Price has recently formed a rising wedge formation (blue lines). The potential for this to be a reversal set up is supported by the RSI which is showing good divergence. Encouragingly,  the first peak in the divergence set up was in the overbought zone.

MQG CFD – Daily. Source: CMC Tracker

Trade entry

Entry could be once the RSI moves below the dashed support line shown on the chart. A move below this level is known as a failure swing. Having made lower highs, the RSI breaches support and makes a lower low as well.

This is an example of the RSI’s potential as a confirmation tool. The failure swing on the RSI is confirming the potential significance of a break below the wedge support. Today’s candle, for example, did push a little below the wedge support without going on with it. The trader would so far be kept out of this situation because the RSI has not completed a failure swing.

A strategy approach

One way of handling this situation would be:

• Sell on a breach of the RSI support
• Place the initial stop just behind the peak at $31.99
• Adopt a let your profits run approach, given the big picture outlook that this may be the end of an upward correction in a major downtrend.
• Use the support zone represented by the 50% retracement level and 200 day moving average as an initial objective to either begin moving the stop down or to take partial profit
• Move the stop loss down as new failure points emerge in the down trend being followed