If you saw a chart that looked like this, would you buy?
Probably not.
Anyone in their right mind would pass on a chart that looked like that. It’s a disaster.
But what if I told you that by passing on this stock, Bio-Reference Labs (NASDAQ: BRLI), you just lost out on as much as 250% gains in under five days?
Because as soon as the stock plunged under that lower Bollinger Band — with an oversold read on Williams % Range and a “doji cross” waving back at you — it was a screaming buy…
(Note: Dojis usually appear at times of market indecision and have called key reversals in indices and individual stocks.)
Take a look at Diamond Foods (NASDAQ: DMND).
Last week, the stock plummeted some 40% after the company’s CEO and CFO were canned following a review that revealed accounting irregularities.
But with the stock trading under the lower Bollinger Band, it was only a matter of time before it bounced off oversold conditions…
A day after recommending a trade on it, the underlying stock was up more than $1.
We did the same thing with Carnival (NYSE: CCL) on sinking ship news.
We bought oversold call options on Carnival in our options program, as Captain Coward was led away in shackles.
The stock had breached its lower Bollinger Band. W%R was sitting at oversold levels, and volume was coming back strong…
A day later, the stock bounced $1.40 — and we walked with 34% gains:
Our “Hedge Fund” Approach
The trick is to keep your eyes peeled for a beaten-up or an overextended stock.
See if it has penetrated the lower or upper Bollinger Bands. That’s your initial pivot point to look for.
Stock prices tend to stay within the upper and lower Bollinger Bands (explained in more detail here).
So when the prices move above the upper Bollinger Band, are coupled with a candlestick (a doji, for example), and an extreme overbought W%R read is present, we expect a reversal at the top.
Then look at Williams % Range (W%R): Is it stuck in oversold or overbought territory?
If so, you have your second trigger set up.
W%R is the ultimate momentum indicator that signals oversold and overbought conditions.
W%R shows an overbought condition with a numerical range read of 0% to 20%. Oversold conditions are measured with a numerical range read of 80% to 100%.
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You also want to look at MACD (moving average convergence divergence) and DMI (the directional movement indicator).
Look to see if they agree on the trend. If so, you have another indication of a reversal off the top or bottom.
The main parts of this system simply require Bollinger Band penetration, W%R, and candlesticks. MACD and DMI signals are secondary.
Keep in mind, there is no such thing as the “perfect” trading system; trading strategies are nothing more than building blocks to the next one.
Coinstar (NASDAQ: CSTR) Banked 270% in Five Days
Notice what happens when this stock penetrates the lower or upper Bollinger Bands.
We rode every bounce and every sell-off without hesitation.
In fact on the last bounce, we banked 270% in days on Coinstar calls, which wiped out the loss on the hedged put.
Take a look at the Dow in a “normal volume” market.
Close to 80% of the time, when the upper or lower Bollinger Band was penetrated with an overbought or oversold read on W%R, we saw a major reversal:
Recent upside moves are due to Fed intervention, “hope-ism,” the idea that all in Greece will turn out fine and dandy, and this notion that we’re actually recovering.
But even as President Obama has told us, a recovery is still one to three years off.
Point is, it doesn’t matter what the market is doing…
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Stay Ahead of the Herd,
Ian Cooper
@IanLCooper on TwitterIan Cooper has been trading stocks and options for 12 years. He contributes options, stock, and energy commentary to Wealth Daily, Wealth Wire, and Options Trading Pit. He’s the Coach behind Options Trading Coach, a beginner’s guide on how to trade options. Ian teaches thousands of loyal subscribers the many ways to be profitable from options rather than simply buying stocks alone. For more about Ian, take look at his editor’s page.
