Sometimes, when it comes to trading, you need to move against the grain. I’m not talking about simply being a contrarian, like taking a bullish position when the market’s full of bears.
What I’m saying is that occasionally, great trading opportunities hide themselves in what appear to be bad situations.
For example, let’s say you’ve found a long trade setup that looks fantastic on paper. Your conditions, as defined by your trading method, are 100% satisfied and the stock has traded deliberately over the last few months – meaning that it’s not “chopping” around aimlessly.
Better yet, there’s nothing that could cause a sudden drop in prices, like earnings or some other sort of macroeconomic event.
Everything looks great, and you’re about to place your initial entry order.
But wait, as it turns out, the stock you’re examining is actually in the middle of a long-term downtrend.
A new all-time low was just set, and share prices are on a downward trajectory.
Should you still take the trade?
Well, it depends. Most of the time, you should just walk away.
But sometimes, a stock is still able to kick out major gains on shorter-term movements (relatively speaking) in the middle of a trend.
Like McDermott International Inc (NYSE: MDR), the stock I wanted to feature for today.
In the weekly candlestick chart above, you can see that MDR has formed a weak, descending broadening wedge. It’s not a perfect wedge, but its rough shape is something that we can use to frame our setup.
In a wedge like this, the stock will typically breakout once one of the trendlines is surpassed. And just like we discussed, we’re looking at a long setup on a stock that’s in a downtrend, as evidenced by the 50-week moving average.
In this case, though, we’re not looking for the breakout. We just want MDR to ping-pong back upwards to the upper trendline.
For that reason, it still looks like a trade with potential.
Add to that the fact that contact with the lower Bollinger Band (BB) was just made, stochastics are very low, and the current weekly candlestick is trading above the last two.
These are all things I look for in a BB “bounce” to the upside.
However, what I typically don’t go after is a long trade following the setting of a lower low. In this case, though, the last few times MDR did that – set a lower low and hit the lower BB – a profitable long trade arrived in the weeks that followed.
This time, it looks like we have the exact same scenario, just with way more room for the trade to run on the upside.
I know it kind of seems counterproductive. And believe me, in most scenarios, chasing long trades in a downtrend is a bad idea.
But here, MDR is in a unique predicament that could produce a rip-roaring winner over the next month or two.
Especially with a general market that looks equally oversold.
