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What does a proper setup look like in stock X?

That is a very good question indeed! From hearsay and my own experience I can tell you that most money is lost when traders jump back into a stock too early. While nobody can predict the short term, let alone long term price development it is very important to always have a couple realisitic scenarios in the back of your mind. This means that when a stock made a move and starts to pullback or flash topping signs I start to imagine what a proper consolidation could look like at this point. This thought process forces you to be objective and helps to tackle down feelings such as hope (The hope that your beloved stock will stop going lower) or fear (The fear that it will quickly turn around and continues to rally without you on board).

When a stock ran up 150% in 3 months then it will take time to digest the move and you must not jump back in on the first little rally off a logical but weak support. You can watch it and it often flashes setups which then falter. Generally speaking the most powerful stocks must digest the move and draw the attention away. Realistic consolidations typically have 2 or three little waves down or they at least test prior lows or former pivots. In order to get the timing right you must realize that stocks often wait for the 50d MA to catch-up with price. The most explosive names just wait for the 20d or even 10d MA on their way up. However once a short term top is in (Stock printed a clear red flag) it is often the 50d MA which comes into play.

Give a stock time to go through the much needed psychological stages of A) Getting rid of weak hands B) Drawing attention away and then C) Attracting smart money again. This can take weeks to months. Rinse and repeat.

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