The following post is an outline of the reasons why I took a long position in $MLNX this past Friday. I have done similar Trade Set Up posts before and I enjoy doing so because it allows me to teach others and also verbalize exactly what I am seeing. If you would like to read prior Trade Set Up Plans, visit this link here:
So, let’s get on with it. On Friday I took a long position in the stock based on a combination of the daily and weekly charts. The process begin with the scans in which I use to find set ups, you can learn more about these scans on the post linked above.
One of the first things I noticed when I pulled up the chart of $MLNX was the daily chart bull-flag that had formed as it held higher within a month long consolidation – this is my favorite pattern. See the chart below for a visual representation.
As you can see above, price was holding higher within a base (on the right side of the chart). This is a very bullish pattern and often precedes a breakout – though, of course, not always.
Another appealing thing that caught my eye was the long term base it had formed, as seen in the above chart, price has been consolidating in a sideways manner for about a year now. This is a accumulation/distribution pattern, a pattern during which a lot of shares are exchanging hands and new holders are formed. All stocks go through these phases and when they are finished, often times a large move takes place as the ‘side’ (long/short) that was wrong has to sell/buy, respectively, their losing position.
It is very easy to spot where the resistance level is in this base, right around 43.00-44.00 a share, every time the stock reaches this level it backs off and goes back down to the bottom of the base. Why then do I think, based off the chart, that this time could be different? A couple things:
1. Price is holding higher within the base below resistance(as mentioned before).
2. The 200 SMA is now sloping upward, the first time this has occurred in all the time it has been consolidating in this year long base, see chart below for a visual.
Finally, the last chart I would like to bring your attention to is the weekly chart of this stock. As seen below the base is long, the stock is holding higher and there is a inverse head and shoulders pattern (unconfirmed, but bullish) that has formed. See below chart for a visual.
So, we have identified a chart of interest, done our analysis, now it is time to a take a trade. However, to take a trade we must first know where we are ‘wrong’ and where the idea failed. In this case, this trade hinges on the fact that $MLNX holds above that daily bull flag pattern. If this is the case, we need to set our stop directly below this area. Therefore, the stop loss for this trade is going to be 41.70ish, below this level and the bull flag pattern will have broken down. Therefore, the long term bullish bottoming pattern likely needs more time to confirm and base out.
Hope this helps. Please reach out if you have any questions/comments! I am here to teach, learn and help.