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.
This article is written substantially from material gathered from the great staff at All About Trends and has been reprinted with their permission. Thanks very much for all your help and support.
PULLBACK OFF HIGHS — On the longside it’s the only pattern you’ll ever need to know.
The Pullback Off Highs (POH) pattern is one of the most bullish and constructive long-side set-ups out there. Rather than go straight up, an index or stock will make a move higher, then spend some time consolidating those gains often down to an area of chart support such as its 50-day moving average, before making another move into new high ground.
When a stock clears these consolidation periods, it’s your opportunity to buy them and take advantage of the next run — and the bonus part is when you catch a stock at the beginning of a new uptrend, you’ll often get to trade the stock and lock in profits over and over again. You are buying it at the point where it’s just started a new move and is near support which minimizes your risk. Here’s an example:
ABVT — Abovenet
Classic Pullback Off High chart pattern
In the chart above are 3 things you ALWAYS want to be on the lookout for:
1. The stock is in a clearly defined uptrend and above the 50 day average.
2. The stock pulled back to trendline support in green. Trendline support also happens to be the 50 day average.
3. Full stohcastics were in oversold position (Green circle).
Once you see those things there is only one thing you need to know after that. That is to draw a trendline (Pink) off the most recent highs as shown. That is what we commonly refer to as a Pullback Off Highs Line or POH for short. Then it’s all about an upside crossover of that line. That crossover is you’re longside entry.
On the longside of the market you now know why they really are the only chart pattern you will ever need to know.
Thanks very much David and I thought that I would include a follow up from the article to see how ABVT
did in the following weeks from that upside crossover of the pink line in the first week of December 2009. As you can see, even if you had waited until the day or two after the crossover and bought around $54 you still would have enjoyed a large move all the way to $66 in just three weeks. It doesn’t always work like that, but in this case it did. Usually though you would place your buy order as soon as it crossed over the pink POH line.
Wow - Pullback Off High chart pattern really works
Like David at All About Trends
says it’s the only long side chart pattern you will ever need to know.
Welcome to FinancialFiguring.com. I hope you will find some answers to qustions you may have regarding all things financial, whether that is investing, insurance, just saving money or anything in between.
Take a look around – you’ll find catagories on Insurance, Investing, Book Reviews, Brokers, Charting, Technical Analysis (no it is not voodoo) and even Fundamental analysis. More are being added every week so please bookmark this site and check back often (or update your RSS feeds).
Recently I’ve been trying to save some money on bank fees and am shopping around for a better (cheaper) institution and will post what I find out. Here it is.
I have several investing goals for 2010 including (see below for 2011):
- Earn $500/week from my investments. This includes both my RRSP and my TFSA.
- Strict adherence to my stop loss strategy (last year I hung on to far too many losers for sentemental or emotional reasons. Gotta cut that out).
- Save money by buying a home gym. Also very very important (although not strictly financial in nature) is to actually USE the equipment on a consistant basis.
- Learn how to use option strategies, both calls and puts.
- Get good at reading charts. This is an art not a science – there are some rules but after that practice makes perfect (if such a thing as art can ever be perfect).
- Plan my trades and trade my plan!
Also since I am a rookie when it comes to blogging you will notice some strange things going on now and then with the blog. All the weird stuff is probably due to me trying something out. Don’t worry I’ll get it fixed eventually. I have some great help from WordPress and also InMotion Hosting. See their link below for great deals on hosting.
2010 was a pretty good year for investing, but as always there is room for improvement.
I did buy the home gym and I do use it. I also joined a Taekwondo club and absolutely love it. I attend classes regularly and have earned my Yellow belt – but now use my home gym less and less. 2011 must be better in this department.
I did NOT average $500 per week in 2010 (it was less) and this remains my goal for this year.
I AM learning how to read charts and gaining a real world education in this respect.
I am now very comfortable buying and selling options (both calls and puts) on straight plays to take advantage of expected market moves. I almost always get the direction correct, but need to work on timing still. Also wish to employ more straddles and strangles.
VPS Hosting by InMotion Hosting
UPDATE for 2011
Hang in there, 2011 is going to be another learning year (aren’t they all?), but so far we are just about on track for our investing goals.