Our Trading Plan in Action: SM's Higher Right Foot Bottom in Trade #1 of 20

The Higher Right Foot Bottom

• Criteria 1: Declining stock and declining 20-MA.

• Criteria 2: The stock was able to break through the 20-MA.

• Criteria 3: The stock makes a higher right foot.

SM Investment Corporation (SM) Chart

• Below is the screenshot of SM Investment Corporation (SM) on April 13, 2023, after the market closed:

SM Investment Corporation Chart: April 13, 2023

• We have conducted our own analysis of the chart, based on our current knowledge and understanding at the time the screenshot was taken. Our analysis is available in the post titled Marginal Stock Trader Tests a Trading Plan: First 20 Trades of 2023. Please feel free to review it.

• In hindsight, we are revisiting this chart from the point of view outlined in the YouTube presentation How To Identify Oversold Markets. What follows is our analysis of the chart using The Higher Right Foot Bottom concept:

Marginal Stock Trader Analysis Overlay: Higher Right Foot Bottom Analysis for SM as of April 13, 2023

Criteria 1: Declining stock and declining 20-MA

• From March 6 to March 14, the SM stock has been making a series of lower lows. During the same period, its 20-Moving Average (blue line) is also declining.

Criteria 2: The stock was able to break through the 20-MA

• On March 17, the SM stock suddenly broke through the 20-MA for the first time.

Criteria 3: The stock outlines a higher right foot bottom

• The stock then made a pullback, showing a lower left foot on April 4 and what appears to be the formation of a higher right foot on April 13.

Conclusion

• The SM stock satisfies all the criteria for a higher right foot bottom pattern, as described by Oliver Velez. This indicates a high probability of a bullish trend reversal, as this chart pattern typically occurs at the end of a downtrend and signals a potential reversal to the upside. 

• Confirmation of the pattern occurs when the stock price breaks above the resistance level formed by the higher right foot. This is typically seen as a bullish signal by traders, who may consider entering a long position in the stock. 

• However, it is important to remember that there is no guarantee that the pattern will play out as expected, and traders should use other indicators and risk management strategies to make informed trading decisions.

SM Stock Performance Confirms Our Conclusion

As of April 16, 2023, we have taken a screenshot of the SM Chart which displays the closing price of the last trading day of the week on April 14, 2023. Based on our analysis, the screenshot confirms that the stock has a Higher Right Foot Bottom pattern. Consequently, we decided to enter the market at Php902.50 and purchased 20 shares, which optimized our available Buying Power of Php20,000. We believe that this trade validates our previous conclusion in the post entitled Testing Our Draft Trading Plan: First 20 Trades of 2023, as it appears to be a self-fulfilling prophecy.

Marginal Stock Trader Analysis Overlay: Analysis: SM Investment Corporation (SM) Chart of April 14, 2023, closing which confirms the Higher Right Foot Bottom pattern. We entered the market at Php902.50 and bought 20 shares.

Marginal Stock Trader's Trading Plan Tested: Trade #1

We outlined our trading plan in our previous post Marginal Stock Trader Tests a Trading Plan: First 20 Trades of 2023 which we are currently testing. This post is about the first of the 20-trade testing process to determine the performance of our plan. Our trading plan consists of 8 Parts, namely:

1. Identify

• There is a set of 10 major bars that the market tends to repeat over and over again. In total, there are 13 bars, with three of them being uncolored. Out of the colored bars, only 10 of them are relevant and repeatedly presented in the market. These 10 bars appear in no particular order but are the only ones encountered repeatedly.

Screenshot of 10 Major Bars from Oliver Velez's YouTube presentation entitled "The Steps Every Day Trader Must Know to Be Profitable" shared via the link https://www.youtube.com/live/30a4gX4bOfU

• We found a Bull Elephant Bar 180 (+180) before the lunch break of April 14, 2023, using the 5-minute time frame.

2. Location

• The Bull 180 (+180) was on and above the 20-MA, and definitely above the 200-MA.

3. State 

• In terms of state, we would describe it as slightly narrow, but most probably above the neutral state. 

• The midpoint between the Tight and Narrow State and the Wide State with the 20-MA either on top or below the 200-MA is the Neutral State. In the Tight and Narrow State, the price of the security is tightly confined within a narrow range, with the 20-MA either on top or below the 200-MA. This typically signals a consolidation period, where the market is undecided about the direction of the trend. Traders can look for breakouts from this range to make trading decisions.

• In contrast, the Wide State occurs when the price of the security is trending strongly in one direction, with the 20-MA either on top or below the 200-MA. This signals a potential trend reversal, and contrarian traders may look to take positions opposite to the prevailing trend.

• The Neutral State occurs between these two extremes, where the price of the security is not confined within a narrow range nor trending strongly in one direction. This state can provide traders with opportunities to take positions in either direction, depending on other market indicators and risk management strategies.

4. Entry Method

• We employed Oliver Velez's concept of Anticipation Entry (AE) to enter the market.

• The Anticipation Entry method is a trading technique developed by Oliver Velez, a renowned trader, and author. It involves identifying a pattern in the market and entering a trade before the pattern is fully confirmed. This technique is used to capture the early part of the move and to enter at a more favorable price than would be possible if the trader waited for full confirmation of the pattern.

• To use the Anticipation Entry method, a trader needs to have a good understanding of the market and the patterns that appear in it. The trader then looks for patterns that are likely to lead to a particular market move, such as a trend reversal or a breakout. The trader then enters the trade before the pattern is fully confirmed, with the expectation that the move will follow through in the anticipated direction.

5. Initial Stop Method

• We set our initial stop to limit our loss at 1 bar. This means we liquidate our position if the price goes down to Php883.50 the low price of the day.

6. Add Method

• Our current buying power does not allow us to add to our position at this point.

7. Profit Method

• We refer to the previous post which mentions of 5-profit taking rules. We shall only consider 3 of the rules.

• Rule #2: Three-Push Profit Rule states that at a certain point, you can either take all, take a portion, or take no profit. An example of this rule in action for SM occurred in the last quarter of 2022, specifically between November 22, 2022 and December 1, 2022.

Marginal Stock Trader Analysis Overlay: 3-Push Profit Rule Analysis for SM

• Rule 4: One of the rules we follow is the New High Profit Rule which states that we should consider taking profits when a stock reaches a new high. An example of this occurred for SM between March 22, 2021 to April 7, 2021, and we are looking for similar patterns to help guide our decisions.

Marginal Stock Trader Analysis Overlay: New High Profit Rule Analysis for SM

8. Stop Adjustment Method

• If the pullback breaks beyond 50%, we need to make an adjustment and exit after three pushes.

More details about our trading plan

We are listing here the other features of our plan that may significantly affect the outcome of the test being conducted:

Stock Bias: SM Investment Corporation (SM)

• Stock bias refers to our preference towards blue chip companies for purposes of testing our trading plan.

• SM Investment Corporation (SM) is a Philippine conglomerate holding company with interests in retail, property development, banking, and other industries. It was founded in 1958 by Henry Sy Sr., who started with a small shoe store in Manila and gradually expanded into other businesses. Today, SM is one of the largest companies in the Philippines and is listed on the Philippine Stock Exchange. Some of the company's subsidiaries and affiliates include SM Prime Holdings (property development), BDO Unibank (banking), and SM Retail (retail operations). SM has a significant presence in the Philippines and has also expanded its operations to other countries in Southeast Asia.

Trading Capital: Php20,000

• This refers to the amount of money that we can afford to lose in the pursuit of trading profits. Based on the related post 7 Categories of Stock Traders Based on Buying Power proposed by Micro Stock Trader, we would be considered  Intermediate Stock Traders.

• Traders falling under the category of "Intermediate", with investment amounts up to Php50,000, typically possess a relatively greater understanding of the stock market and its technical as well as fundamental analysis. They are often inclined toward high-risk investments and begin to diversify their portfolio.

Online Broker: BPI Trade

• BPI Trade, the online trading platform of BPI Securities, which is the stock brokerage arm of the Bank of the Philippine Islands (BPI), is a fully integrated platform that allows clients to place online orders to the Philippine Stock Exchange. It provides real-time stock market quotes and comprehensive research, empowering users to make well-informed investment decisions anytime, anywhere.

Primary Source: Oliver Velez Trading YouTube Channel

• Oliver L. Velez has been the #1 source for professional trader education since the mid-1990s. Through his best-selling books, global seminars, and his intensive training sessions, he has reached and changed the lives of tens of thousands of traders worldwide. 

Investor Type: Aggressive Investor

• In a related blog post Awakening of the Marginal Investor or Speculator by The Starter Investor, the aggressive investor is someone who fully comprehends their security purchases and justifies them through personal study or experience. This investor can expect to double the average annual return of the defensive investor but also accepts the possibility of significant losses. They are comfortable with high-risk investments such as stocks and have a long-term investment horizon.

Trading Style: Swing Trading

• Although we mentioned in our About Micro Stock Trader page that we focus on day trading, we realized early on that we need to be at the Advanced Level Category online trader with up to Php100,000 trading capital to be profitable in the market plays of a day trader. Hence, we would be more comfortable doing swing trading while testing our trading plan.

Candlestick Chart Time Frame: Daily Chart of Closing Prices

• A candlestick chart is a type of financial chart used to represent the price movements of an asset over time. In our specific case, the candlestick chart is based on a daily time frame, which means that each candlestick on the chart represents one day of trading activity. 

• The chart is based on the closing prices of the asset for each day, and the candlesticks are formed by plotting the opening, closing, high, and low prices for that day. The candlestick chart provides a visual representation of the asset's price movements and can be used to identify trends and potential trading opportunities.

Time Frame of Trade: 3 to 10 Days

• Our time frame selection is based on the desired trade duration.

• In this case, we aim to take a trade with a duration of three to five, to ten days.

• Hence, we have chosen the daily time frame to facilitate our trade.

• This information was derived using Oliver Velez's YouTube presentation titled How To Trade Key Retracement Without Indicators.

In summary, this is the trading plan being tested by Micro Stock Trader: We prefer blue chip companies and have a bias towards SM Investment Corporation. We have a trading capital of Php20,000 and use BPI Trade, an online trading platform. Our primary source is Oliver Velez Trading YouTube channel. We could be classified as aggressive investors but with short time horizon, and our trading style is swing trading. We use a daily candlestick chart to represent the price movements of an asset over time, with a time frame of 3 to 10 days.

For our first of 20 trades, we have identified and eventually confirmed the Higher Right Foot Bottom pattern. For our next trade, we are keeping watch of either the 3-Push Profit Rule or the New High Profit Rule patterns to show up for our exit.

Alternatively, we can still refer to the BPI Trade Traders' Takedown report giving SM a BUY rating and establishing a target price (PT) of Php1,120, indicating a potential increase of approximately 25% as of April 12, 2023. 

We invite you to keep reading our posts to find out the results of our testing. We are excited to share our progress and insights with you as we go through the process of implementing and refining our plan. Stay tuned for more updates!