ROVI : Anatomy of a Failed follow through play

ROVI : Anatomy of a Failed follow through play

First of all I need to give credit where it is due. I learned this play from Nathan Michaud over at INvestors Underground. The first time I saw this set up being talked about was in his DVD textbook trading. Now that I got that out of the way let me give you my take on it.

What exactly is a failed follow through? It is a chart that is a bit over extended to the long side ( on the daily timeframe ) Preferably you want the day prior to have been a strong day but you also want to see some trouble heading into the close. So it tried to close on its highs and maybe it did but it suffered to get there. Let's look at the daily chart on ROVI after today's action

You can see here that it had a huge red day today. It opened green but closed deep red. So what on earth happened? Here is a look at the intraday with 2min candles shown

This is a pretty solid example of a failed follow through. The stock in question HAS to be slightly overextended or it wouldnt set off the radar for you to take it short in the case of a quick failed up move. What is the psychology behind this move? Well whoever saw ROVI yesterday would say ok this is a solid long play , if it gaps down I can take it r/g , this is the mind of a professional trader. What happens when amateur traders see the gap up? Many want to chase. They saw the action yesterday and they dont want to miss out. But the pro knows that this has ran quite a bit and another gap up is NOT sustainable. So what happens? It pops green and then instantly it is faded. Once you have that bias in place you know what to do the second you see this move. You short it! and short it hard! I like to visualize a train trying to move up the hill and it just slides back because it can't push any further. That visual has helped me to understand what a failed follow through play is all about. It tried to pop its ugly head and gets wacked. Remember though, as I always say, it is the BIG picture that counts. Hope you guys enjoyed this post!