Today we are going to look at several charts that are displaying the same pattern. Namely the “1st Thrust Down” pattern. This is a change in trend pattern (from Bull to Bear). There has been several of these patterns spotted recently and this is an indication of what the market as a whole might have in store for the near future. Lord knows the market can’t always go straight up.
Take a look at this first chart (courtesy of All About Trends, and used with permission) of Rovi Corp towards the end of Feb 2011. The notes on the chart are pretty self explanatory – but notice also the RSI during the ‘snap back rally’ doesn’t really climb. This was another signal that perhaps the bounce off the 50 day MA was not going to be sustained.
Now take a look at this second chart of Allegiant Travel Co. from the same time period. Once again during the snap back rally the RSI never breached 70 and was once again another signal of a change in trend from up to down.
Here is the third chart showing a ’1st Thrust Down’ pattern. This is Silicon Laboratories on Feb 23rd.
Lastly here is a look at VMWare from March 2nd. Notice the now familiar first thrust down, snap back rally (but fails to go to a new high and RSI hovers in the middle) then bombs away. When the stock breaks the snap back rally trend channel that is your sell signal (or you can buy puts for those who like to play options).
This chart also shows where the bomb dropped so to speak. Notice that the bounce occurred in the neighbourhood of the 200 day MA, and signals that it might now (or soon anyways) be a good time to go long. Naturally you will want confirmation from the S&P500 charts and Dow charts so that all are moving in the same direction, before making your purchase.
Using stock charts can provide a wealth of information about how a company is trading. Charts can provide hints of a coming rally or just the opposite is about to ensue. Combined with other buy and sell signals stock charting is a very useful tool.
Charting works because on a large scale human nature is predictable. Not individually of course, but when you are talking about large numbers of people – like everyone who is trading stocks. It is because people follow predictable trading patterns that there are certain chart patterns that can be worth a gold mine. (see my previous post)
These areas of a chart that coax people’s behaviour into buying or selling are often called lines of support and resistance. Don’t be fooled by the name however; they are zones, not hard and true lines. These zones are flexible. In fact, if you see a breach of short term support during an intraday move, you could be getting a signal of strong buyer support.
Winthrop Realty Trust, Inc
Take a look at the above chart of Winthrop Realty Trust, Inc. There are two patterns here to note.
First, look at the blue support line. Throughout most of October the price of FUR dropped below this line, but only intraday. Every time it dropped below the line there was strong buying that pushed it back before the end of the day’s trading. This is a terrific signal that buyers were willing to add to their positions during intraday weakness. Investors were unwilling to sell shares during these weak points. Another key point to note is that volume was strong when it finally did break out.
Secondly, we have a rising wedge pattern. This is very bullish and indicates that a strong rally may soon occur. Again look at the blue support line. Investors were buying the price dips and over time were not willing to let the price fall as far as the day before. The red resistance line indicates that there was reluctance on the part of buyers to pay higher prices. Again for most of October the maximum price investors were willing to pay was around $13. Eventually these two lines meet and the enthusiasm of buyers usually overpowers the reluctance of resistance.
It is a good idea to wait for the market to close before pulling the trigger on your trade. Volume is used to confirm a move in one direction or another. If you had been scared off by the intraday moves below the blue support line you would have missed a lovely break out above the red resistance line.