Wouldn’t it be great if you could buy a powerful stock after a pullback just as the downward momentum stops and the stock begins going back up?
It was my goal to come up with a setup that did just that. After much experimentation, I came up with a setup that I call the Slingshot.
What is it?
My Slingshot indicator is simply a 4EMA of the highs. Buy using the highs instead of the closing price, I was able to find stocks that were powerful enough to break the short term downward pressure. And, when the selling is done, the stocks start to run.
First, there must be upward momentum. A pull back in a stock in a downtrend is merely an opportunity to sell into strength. That’s not what we want to trade. Ideally, we want to find a stock that has recently made a strong move. – often following an earnings gap.
Look at tesla, it had a powerful move. It then pulled back and consolidated at the 20ema. When it triggered the slingshot it never looked back
Look for Consolidation
Tight trading ranges before the trigger are ideal for two reasons. It signals that the selling pressure is waning and perhaps, more importantly, it permits very tight stops.
I typically place my stop at the low of the slingshot day. Or at most, the bottom of the consolidation period. Stops should be tight, much tighter than a breakout. The advantage of the setup is that it provides a low risk entry with a tight stop. If it works, I will have ample room to avoid the crowded breakouts.
TTD had 2 slingshots. This is a good example of both a bad slingshot setup and a great slingshot setup. The first slingshot was a reactionary bounce it had not worked out the selling pressure. When a stock has to make a bigger move to trigger a setup, it tends to not work as well. The trading range on the second slingshot was much higher and had demonstrated some buying support. This one was a great entry.