Keystone's 80/20 Rule

A tool worth monitoring for all trades is Keystone's 80-20 Rule.  Not so much a rule, more of a guideline to help navigate trades.  The rule says that when a stock, or any ticker, index, sector, reaches the 80 level, the risk-reward is in favor of that ticker moving to the next higher 20 level.  If the 800 level is achieved, then the next higher 200 level is targeted; if the 8 level is achieved, then the next higher 2 level is targeted.  The rule is used for dollars and cents and is used with daily closing numbers.  Are you lost yet?

The guideline is quite simple, examples are the best way to illustrate.

Let's look at the SPX.  The 1480 level is in sight by bulls with an intraday high thus far this year at 1475-ish.  If a close above 1480 occurs, then the SPX will likely move to the 1520's. On a smaller price move level, 1478 would lead to 1482.

Oil is now printing 91.91, under 92, printing a low today at 91.25.  The 80/20 rule works in reverse as well.  If the 2 level is viloated to the downside then price will likely move to the 8 level underneath.  Thus, for oil, since 92 is violated, a move to 88 may now be on tap.  This rule helps with entering and exiting stocks since knowing this for oil, rather than jumping on the long band wagon now, it is probably best to hang out for 88-ish.  If 92 leads to 88, then a break of 88.20 would lead to 87.80, so perhaps a long oil trade may look very good if the 87.70 to 87.90 range is tagged. You may notice on the Picks and Positions page on this site that many of the potential plays have target entries that use this 80/20 concept.

Are you getting the hang of it? Let's look at other things going on in the market to see how the 80/20 rule may provide insight.

For the Dow Industrials, now at 13537, topping over the last few days around 13700-ish.  Thus, watch for a close above 13580 which would hint at a move to 13620.  A close above 13800 would set up the pathway to 14200 and bulls will be throwing confetti.  On the downside, if the Dow closes under 13520, this paves the way for a potential run to 13480.

Remember the positive divergence set-up that Keystone identified for the bounce in FB to start September?  That was from the 17.5-17.9 area.  Price fell thru 22 in August so that paved the way to 18.  Then the failure at 18.20 led to 17.80, and since the 80/20 rule was fulfilled, along with the beatiful positive divergence, the long call was easy.  FB is now moving thru 18-22 and will end up favoring price above or below this range. There is a large gap fill needed at 25 but over the coming days and weeks a move lower is likely on tap.  Price is now 21.61, so watch to see if a close under 21.20 occurs which would hint at a move to 20.80.

AAPL is at 685-ish now after printing a smidge over 700 last week.  Keystone was looking for an Apple top at 680 but once the close above 680 occurred, the 720 is in play, and still remains in play.

For small caps, the Russell 2000, RUT, has not closed above 880 yet, so 920 is not in play. Now at 851, watch to see if RUT closes under 820 which would pave the way to a 780 target.

Gold is interesting, testing the 1780 level over the last few days but unable to close above as yet. 1780 would lead to 1820.  But gold price is leaking lower now so watch to see if gold closes under 1720 which would lead to 1680.  GLD closed above 168 so that said price likely wants to visit 172, which it did to satisfy the 80/20 rule.  The loss of 172 may now lead back down to test 168 again.

For the euro, looking at the FXE, the move above 128 hints at a need to see 132. Price has come back down to 128.27 now.  If a close under 128.20 occurs, then a move down to 127.80 may be on tap, then the decision is made if the euro will receive another boost to print the 132 or not.  

Simply check all your current holdings and how their prices are moving in relation to upward movement of 8's to 2's or downward movement from 2's to 8's. Using this rule is obviously a bit more of an art than a science but it is very useful and you will be surprised at how often the price action plays out according to Keystone's 80/20 rule.
This is only one tool in the tool box, a lonely wrench within a bundle of wrenches, within a large box of technical analysis tools, but with all aspects of trading, using Keystone's 80-20 Rule in conjunction with many other technical analyses, and fundamental analyses tools, helps provide an additional edge against other traders, which is obviously the name of the game, always increasing the risk-reward in your favor.  Monitor Keystone's 80-20 rule for your trades moving forward, especially to aid you in setting proper exit and entry targets. This information is for educational and entertainment purposes only.  Do not invest based on anything you read or view here or any links connected to this information.  Consult your financial advisor before making any investment decision.