Coinbase Inventory Did not Crash, However the Commerce Nonetheless Raked in Money | Do not Ignore This Chart!

As a dealer, calling market tops (or bottoms) is a troublesome and doubtlessly harmful factor to do. Calling a market prime on a essentially sturdy inventory throughout a robust uptrend might be a silly factor to do. However for swing merchants, exploiting such a commerce can typically be tempting, particularly when the technicals are flashing crimson for an impending decline.

Final week, Coinbase’s (COIN) technicals gave a robust sign {that a} pullback was imminent. The whole situation was specified by the article “Is Coinbase Inventory About to Crater? Here is One Strategy to Exploit It“. It seems this setup labored, however just for the primary goal.

Here is an replace on what occurred, plus just a few phrases on managing danger.

CHART 1. DAILY CHART OF COINBASE ON MARCH 12. All indicators pointed to a possible pullback within the inventory’s value.Chart supply: StockCharts.com. For academic functions.

On March 12, the next was obvious:

• The Relative Energy Index (RSI) learn “overbought.”
• The Chaikin Cash Circulation (CMF) confirmed an excessive bearish divergence; shopping for strain gave technique to promoting strain because it dropped beneath the zero line.
• The pin bar sample confirmed sturdy rejection from the underside, indicating substantial shopping for exercise and the potential for a number of cease losses proper beneath the bar.

This commerce aimed to exploit the cease loss space for a speedy, short-term dip, by which the primary goal could be the center Bollinger Band (the second goal could be on the former resistance line).

The result:

CHART 2. DAILY CHART OF COINBASE. First goal hit, however must you maintain for the second goal?

The chart displaying the result above was zoomed in to offer a better view of what occurred.

On the day of the commerce entry, you may have estimated that the risk-to-return could be close to 1-to-1 (roughly) for the primary goal, which wasn’t a foul ratio.

With a brief entry at $242.05, a cease loss at $271.65, and a goal materializing at $219.95, the ratio turned out to be 1.33 danger to a unit of 1 (or a danger of $29.60 for a return of $22.10). The quantity of your potential loss or acquire would rely in your place measurement (i.e., the variety of shares you traded).

The newest candlestick on the proper displays a robust rally on the day of the FOMC rate of interest announcement. With the Fed holding charges regular and reaffirming three extra cuts this yr, the broader market jumped; COIN went together with it.

And whereas the CMF exhibits an uptick in shopping for strain because it strikes above the zero line, notice that the amount continues to dwindle. The “shorts” who exited the commerce did so with an honest, albeit small, short-term acquire. Nonetheless, just a few might have partially exited their positions, hoping to catch that second goal. In that case, market sentiment in response to the Fed’s newest resolution might or might not work of their favor within the coming days.

The Backside Line

General, shorting a robust inventory primarily based on a technical studying can typically current a respectable “imply reversion” alternative, which some swing merchants are more likely to reap the benefits of. On this case, COIN did revert to the imply as measured by the Bollinger Bands. And in the case of riskier short-term trades like this one, it is typically finest to intention for the lowest-hanging fruit, so to talk, to take what you’ll be able to. In spite of everything, that is arguably what swing buying and selling is all about.

Disclaimer: This weblog is for academic functions solely and shouldn’t be construed as monetary recommendation. The concepts and methods ought to by no means be used with out first assessing your personal private and monetary state of affairs, or with out consulting a monetary skilled.