Skip to main content

Trade Setup: RMD

The price of ResMed Inc. (RMD) recently broke out of a resistance barrier on multiple timeframes.

First, the monthly chart shows a clear break of resistance near the $60 level. Historically, this behavior in RMD and other stocks is constructive for a long set up. You can see from the past 10 years of monthly price data that RMD has a tendency to trend, consolidate for a while, and then trend again. At the point of breakout, a long position was unconfirmed by MACD, a trend indicator, but with further price improvement it exhibited a bullish crossover. Additionally, comparing RMD’s lows in its most recent range bound consolidation with MACD-H confirms its advance leading up to its breakout.


Second, after zooming in one order of magnitude shorter to the weekly time frame you can see a more granular view of the breakout from the monthly chart. From a trend perspective we now see the price above its 40-week moving average (200SMA) and a fairly consistent bottom left to top right price trend over the past 5 years. Trend is also confirmed with the direction of MACD and its bullish crossover.


Third, on the daily chart RMD exhibited a textbook breakout over 60 with above average daily volume. Leading up to the breakout you can see a clearer picture of higher lows as price re-tested resistance at the $60 level. Additionally, we see steady improvement in RSI over the past year and confirmation on the breakout with its own highs. 


You can see on the longer time frames that RMD previously made a swift move from 60 to 75 and then back to 50 with 60 providing significant resistance. Based on the recent action, price has begun to advance just as quickly as before with its change in the supply and demand balance as well as improved general market conditions.

However, risk should always be managed and, depending on your time frame, when initiating a long position at the breakout a stop loss could be placed below the recent swing lows of 55 on the monthly and weekly charts or 58 on the daily chart.

Occasionally, breakouts will consolidate through price, not time, after the initial thrust out of a consolidation zone. Note how after the breakout RMD retested the $60 area before resuming its advance.

To manage the upside, you can use an Average True Range (ATR) to take profit on any swift expansions. Always have a plan for where to get back in after scaling down your size so long as the price still warrants a position.

As always, please feel free to contact me with any comments or questions. Thanks for reading.


John

Labels:

Comments

Post a Comment

Popular posts from this blog

Research Review: Does Trend Following Work on Stocks?

In November 2005 Cole Wilcox and Eric Crittenden of Blackstar Funds LLC* (now Longboard Asset Management) published a research report analyzing the effectiveness in using a Trend Following   trading strategy in the US equity markets.   Both fund managers were using Trend Following successfully in the futures markets for many years.   Their success with Trend Following, as well as their peer's results in similar markets , piqued their curiosity and led them to conduct this research.   The strategy tested is a long-only Trend Following program. Trend Following uses absolute price change to delineate strength or weakness in a particular security. In this case, the researchers added long exposure on positive absolute price changes that resulted in an all-time high on a one week closing basis. Before actual testing began, Wilcox and Crittenden made sure to address any data issues. For example, given the expansive time horizon for testing, the authors account for security-sp
2 comments
Read more

Managing Position Level Risk with Dr. Alexander Elder’s 2% Rule

Executing sound risk management principles in your trading is essential to having any chance of investment survival. If one position is sized too large and generates an enormous loss, this can be catastrophic to your account as well as your psychology as a trader. Fortunately, there are methods you can learn that will protect your account. In The New Trading for a Living , Dr. Alexander Elder proposes a method for controlling risk at the position level which he calls the 2% Rule. This guideline states that the total risk in any position cannot exceed 2% of the current month-end account value. For example, if you have $100,000 in your account at the end of the previous month, the 2% Rule limits your maximum risk on any trade to $2,000. That is, risk is defined as the dollar value of the difference between your purchase price and stop loss and cannot exceed 2% of the account value under this rule. Be sure to not confuse 2% with the total position size. While 2% may seem sm
3 comments
Read more

Possible Kangaroo Tail Developing from Longer Term Perspective

Despite the title of this post, the curious development of animal anatomy will not be the topic of discussion. Instead, readers will have an opportunity to observe a potential reversal move underway in equity markets and crude oil delineated by this distinctive price action. No trend can last indefinitely and being able to spot signs of a reversal will help a trader better manage a position. One such method is identification of price action through what Dr. Alexander Elder describes as Kangaroo Tails. This sort of price behavior has a unique pattern. Elder states, “A Kangaroo Tail consists of a single, very tall bar, flanked by two regular bars, that protrudes from a tight weave of prices” (How to Trade for a Living, 65). Kangaroo tails that close down indicate a potential market top whereas when it closes up a possible reversal higher is developing. As with most patterns, price action on a long term basis usually carries more weight as it represents a general shift in the market
1 comment
Read more