Return To 4

One of my tools is the Return to 4 (RT4) method which I use in gap-up situations to inform a day trade.

It looks like this -


Even though I call it the Return to 4 the price could actually drop through to the 8 or to the 21 - the method remains the same. In order to know that you have the real thing you must see the rebound candle and buy off the top of that. In the chart above and below that is the third candle in.


Frequently, as seen here, the RT4 is associated with a pivot level, in this instance it was resistance 1. After crossing back through R1 it rebound from the EMA 8 and passed through it again going up. This trip took it all the way to R4 before it started getting choppy.

As a little added value - note that a BOB formed just below R4 and it took off again for another great day trade opportunity.

This method works from minutes to months although you might not get a gap-up on the monthly charts. Instead what you will see is a long candle and then several short ones as the stock pulls back to the EMA 4, then it will rebound and away it goes.


Here you can see one forming between April and August of '06 - about the time that all of the bobbleheads on bubblevision were calling for a market collapse what was really happening was a RT4. Isn't it amazing?

Return To 4 Part 1

As we will see the “Return to EMA 4” set-up doesn’t have to stop at EMA 4 it only has to return to at least EMA 4. While it always gets there sometimes it overshoots.

The set-up is simple – a stock price goes up abruptly in the first 15 minutes either as a gap up or as a straight shot higher from the previous day’s close. Here is an example in Goodyear (GT).


Note how Goodyear jumped up at the open and then slid sideways until it made contact with the EMA 4. At that point it printed a spinner (indecision) and on the very next candle made up its mind and away it went.

But how can you be sure – here is LPL


– same basic scenario – gap up, slide sideways down to EMA 4 and then start to go up but then flame out and go nowhere.

Well one way is to use the pivot point method with the Return to EMA 4. Here is GT with the pivot points.


You can see how it came back to the pivot point and then took off from the pivot point. So let's add a rule – must be in contact with one of the pivot points before a trade can be taken.

Here is LPL with the pivot points -

– and you can see that it is already above the second resistance and once that high there is no need to take the trade.

As I said in the introduction the price doesn’t necessarily have to stop at the 4 – it can continue on through to the EMA 21. Here is FRPT –


But look at FRPT with its pivot point –


Once more it hits the pivot and takes off. This time it comes back to the pivot once more before it finally makes the second pivot. I’ve also noted on this chart where a good spot for the stop loss might be – and that would be the next lowest pivot point.

One more example of going through the EMA 4 and this time it settled on the EMA 8. Here is KNOT –


And here’s KNOT with its pivot points


I had to annotate this chart with Midpoint High which is a valid pivot point that occurs half way between the actual pivot point itself and Resistance 1. And that is where KNOT chose to make its stand (or where the traders decided to start buying). You can usually "eyeball" midpoint high and low on the chart - it doesn't have to be precise.

I get my gap ups with a filter that I named “gap up” but that’s only because I’m not very creative. Prophet.net has a filtering capability that I can use but I prefer using Stockfetcher (even though it is 20 minutes delayed) because then I can write my own set-up and not just accept what the Prophet guys think I should use. The fact is the 20-minute delay is good (for me) because it keeps me from entering trades early in anticipation of what might happen rather than what actually happened. And yes I could probably find a better piece of software but this works for me, is reasonably priced, and I enjoy the little bit of work it takes to make it all come together. I am truly a hands-on kind of person – I like to see things working and not rely on some magical black box approach to trading.

Part 2 below has a few more examples for you to examine as well as a potential use for that pre-market data.

Return To 4 – Part 2

In part 1 we introduced you to the concept of Return to EMA 4 using pivot points. A lot of people use the return to a moving average approach but most use the MA 5 instead of EMA 4. I’ve never done any testing of this - I just believe that the EMA approach is superior because it is closer to reality. Here are some more examples –

First we have JCOM.


Here we had a drop through to the EMA 21 and an immediate rebound to form a crossover. That in itself would have been sufficient but here is JCOM with its pivot points –


In this instance it came back up through the pivot point itself. These are 15-minute charts so you could have taken this trade as soon as you saw the rebound occur at 27.95 or so. An hour later the price bumped up against resistance 1 and started printing steeples. You all know how I feel about those. I also annotated this chart with midpoint low, which is halfway between the first support and the pivot point. That would have been a good place for the stop loss.

Next we will review TTWO.


This one gapped up and then slid back to the EMA 4. Did it hit a pivot point?


The answer is obviously “no” so we would pass on this stock.

And last, but not least, we have one from this morning – SIMO. I only wish that I’d had this one.


You can see that it gapped up and then immediately came back to EMA 4 only to rebound strongly and form a crossover. Did it hit a pivot point?


Absolutely - and then it took off. I printed this chart and the previous one early - this stock just kept going from here currently 25.79.

But there is one more chart option I want to show you on this one – an option that you can also use to help inform your trades – here is the pre-market.


You can see from the pre-market that this stock was being traded with great exuberance. When that carries over to the regular hours it is a thing of beauty.

A gap-up like this can work in just about any market. It is just a matter of getting a set in a price range where you can buy in bulk and wait for the set-up to find you before you commit your hard earned cash. When you couple the Return to EMA 4 with the pivot points you get a very powerful trading tool.

The "Return to EMA 4" set-up is not "technical analysis" – it is a trader’s observation and, as such, it is based on real-time price action which, when coupled with TA, makes it especially potent.

Return To 4, Return To 8 - Daily Charts

Here are some more examples of entry methods - this time on a longer time frame for those of my readers who would prefer a swing trade or maybe a little longer time horizon.

First we have GES - showing a classic Return to 4. It also has a BOB and a crossover. The BOB came first and this time happened to involve a cross over formation (a positive body across both EMA 4 and EMA 21). Both of these things suggest something good is going to happen. But if you bought the next day you would have had the stock start going down. Now if you watch the stock for awhile and don't set your stop too close you will see it hit the EMA 4 and then rebound.



Next we have PCU and it is showing a Return to 8 (although I have been known to call this "retreat to 8 so as not to confuse it with return to 4), a modest cross over and a dummy spot. Normally I would have bought this off the confirmation of the dummy spot on the next day, but buying it off the cross over would have been just fine and, if after all that you wanted more of an indicator - the return to 8 was looming with a very nice bounce and buy. That was 6 points higher than the dummy spot but a world higher in probability of success i.e. lower risk.



And that is what it is all about - risk, risk, and more risk. Each of the entry methods on these two charts possess their own risk factors (fair, better, best) and you have to make your decisions appropriately.

The way you can find these is to set up a monthly view of the daily charts against a watchlist in any one of the many free charting services that are available and then just walk through the charts one by one. You can do this late Sunday evening. As you go through them print out the ones that look promising (or copy them into a separate file) and keep going. Once you have a collection or 8 or 10 candidates then do your due dilligence, check whatever fundamentals need to be checked - review when earnings are going to be announced and then put your favorites on another watch list and watch it. Make your buys when it's appropriate.

And needless to say but I will anyway this is not an invitation to speculate in the stock market and past performance is not to be construed as an indicator of the future.

Return To 4

This is my second favorite set-up. It is a lot easier than the BOB - The stock goes up, then comes back down to touch the EMA 4 (or MA 5 - some people still use SMA). It bounces there and when it does you buy it. You put your stop under the EMA 21 - 5 cents and just wait it out.

It doesn't have to come back to the 4 - it can also go sideways into the 4. Occassionally it will go through the 4 and bounce off the EMA 8 - that is just as good. The example I'm showing here has an added feature which is the crossover - the crossover here is just icing on this cake and is not necessary for the set-up to work.

Here are three views on three different time frames of the same stock on Wednesday.

First the 30-minute chart annotated -



Next the 15-minute chart annotated -



And then the 10-minute chart annotated -



The point I was trying to make with the three views is that the 15 and 30 minute charts are easier to work with and - most importantly - the trade doesn't care what time frame you use - it breaks out when it breaks out. Sometimes you can catch a trade a few minutes earlier than other times and you might make or lose a few cents one way or another but most often it is better to just take the set-up when it is presented on the 15 or 30 minute charts and let the trade develop as it will.