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RIMM Shows us a Lesson in Open Air Pockets Mar 9

I wanted to highlight an important lesson we can learn from the recent breakout action in Research in Motion (RIMM) as it relates to “Open Air Pockets” and how traders can manage risk and take advantage of these opportunities as they develop.

Let’s take a look and see what RIMM’s recent chart can teach us.

What I’m showing is a pure price chart with the dominant Fibonacci Retracement grid from the September $88.00 high to the $55.00 low.

The highlighted zone between the 50% retracement at the 61.8% retracement can also be called the “Pocket” or “Open Air Pocket,” especially when you combine it with prior resistance at the $71 level, both as support and resistance going back to July (black line).

Why is this important?

That’s because, when trading, you need to establish “IF/THEN” statements to guide your thinking, stop-loss placement, and target setting.

Let’s assume two scenarios.

1.  You are bearish, and believe the $71 resistance level and the 50% Retracement will hold, and so you short RIMM as it breaks under $70.00 on Friday.

Where is your target? Perhaps you target the prior low at $60.00.  Easy enough.

Where is your stop? Clearly, your stop will be located above $72/$72.50 because of the “Open Air Pocket” principle.

Why?

In the event that buyers push price above the $71.20 level (50% Retracement), then that will trigger the stop-losses of the sellers (yourself included) and if buyers are stepping up, will create a “Positive Feedback Loop” where a quick ‘pop’ is possible.

In the event this happens, you don’t want a wide stop because you could be hit with a larger than expected loss… and that’s what happened.

The next logical zone for price to stop – or to face resistance – is here at the 61.8% Fibonacci Retracement of $75.00.

So you survived to trade another day with a smaller loss than if you stubbornly held to your short-sale and got pummeled by the rapid upward movement.

Alternatively, let’s assume neutrality and that you were waiting to see what happened at the $71.00 level…

2.  You are neutral, but have an “IF/THEN” target of $75.00 in the event that buyers push price into the “Pocket” and begin triggering stop-losses.

In this case, you would not have taken a short-sale, but perhaps anticipated the “IF/THEN” of the positive feedback and entry into the “Open Air Pocket.”

As such, you would have been monitoring this stock very closely on your intraday frame, and seeing the move above resistance, put on a buy order early on Monday’s session as price and volume began to pick-up intraday as you trade long (buy) to target the next ‘stopping point’ (resistance level) at $75.00.

At this point you would be exiting your trade near the $75.00 level as price interacts with another key inflection point, and another “IF/THEN” scenario unfolds now.

You had to set this scenario up in advance, because the move off the open was a “gap and run,” so you had to be confident in your assessment of the “IF/THEN” probabilities and the concept of “Open Air” zones.

Keep in mind that Open Air zones are not always highlighted by Fibonacci Grids, but sometimes by trendlines and prior price levels (it doesn’t have to be complicated).

I refer to this phenomenon many times as “Popped Stops” or “Open Air Pockets,” but the concept and opportunities are the same – again both for…

Risk Management (do not “give the market room to run” by dragging your stop-loss up if price is in “Open Air”) and

Quick Opportunity (trade as price unexpectedly moves into a “Pocket” of stop-losses/buy orders to play for a quick ‘pop’ to the next level)

Take a moment to study this principle on other stock charts as well as intraday frames and see if you can incorporate it into your own trading plan.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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