Catching the Bounce

Good morning,


Today I'm going to discuss "catching the falling knife" or trading price reversals after a sharp down trend.


Our case study will be Quindell plc - a great company in my opinion - which was hit both by a shorting attack and by a listing issue ironically caused by them growing too fast.


1. The chart:

https://www.google.co.uk/finance?chdnp=1&chdd=0&chds=0&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1400772600000&chddm=61320&chddi=86400&chls=CandleStick&q=LON%3AQPP&ntsp=1&fct=big&ei=97J9U-iEAbOBwAPzsIHYBQ


2. Look at the daily chart:

- We're going to start by looking at the daily chart, which is the easiest way to see the full picture of what happened to Quindell.

- The key date to observe is April 22nd.


3. Trading April 22nd:

- People who specialise in trading reversals will almost always look for two things:

                     - an intra-daily heavily oversold point to make an entry at.
                     - a case where it's clear that fundamentals have not been changed.

- These two factors were both true in the reversal on April 22nd and the most effective way to trade this situation would have been something like this:

                    - Acknowledge the price is falling.
                    - Look at the likely stop loss levels (a sharp sell off will trigger these and cause further            price falls). 
                    -  Base your entry point slightly above where a level of strong support exists (in this case around 18.25/18.50p).


4. The reasoning behind this style of trading:


- Acknowledging that the price is falling seems obvious when catching the falling knife, but on AIM in particular shares traded on SETSsq will be subject to market maker manipulation, which can cause these stocks to fake a price fall to the downside. Therefore, I strongly recommend only trading reversals where you know that the stock is traded on SETS (electronic share matching) and not SETSsq (market maker matched trading and exchange).


- Stop loss levels are incredibly important to watch, because we can use them to our advantage when we make a position in the market. If we can see a lot of stop losses on the order book placed within a tight range of each other then it's very likely that a warp price drop will activate these and cause further price drops. This means that knowing the depth of the L2 order book is very helpful when trading these intra-daily.


- Setting your limit buy or market order slightly above the strong support on the chart is essential to ensure that you're actually able to make an entry into the stock. It's inevitable that a lot of people will have orders placed on the support line to buy, but that many of those will not be triggered when the hits the support level, due to excess demand at that point causing the share price to regain upwards momentum. By having your entry set at 0.25/0.50p above this level you are hedging against not being able to make an entry at the support line and then having to pay a premium when the demand at the strong support causes the price to rise again.


5. Knowing when to hold:


- For the guys trading only intra-daily this point will matter less, but for those who tend to hold positions for a few days this is a really handy point:


                        - Look for the forming bull flag (April 23rd).


- The day after the initial price fall you will likely experience extreme volatility in the share price, but a bull flag will begin to form if the range of the share price holds above the low range of the previous day. This would be a strong indicator to hold your shares.


I hope that all of this text wasn't a turn off,


The Masked AIM Trader.