All Entries in the "chart patterns" Category
Always Look to the Left
December 28, 2011 at 2:46 pm
A friend of mine recently mentioned that the area to the right of price is the only place on a chart where you make money. He’s absolutely right. But I’d add that by also looking to the left, you can save money as well.
Take for instance CXO. Right now the stock is sitting in a short-term bearish formation. The stock recently declined for a couple of weeks, then has attempted to bounce – without success. That has created a small rising channel, or bear flag, which is quite likely to be resolved to the downside when taken at face value.
So am I going aggressively short here? No, and here’s why:
Short-term, this looks like it wants lower. But by looking to the left, I see more than just the selloff and feeble bounce attempt. I see that just about $3 lower is a major level which has served as both support and resistance in recent months. That could again provide buyers with a spot to take a stand, and it poses a threat to this setup as a bearish play – a roadblock for the trade.
Here’s a closer look at the chart:
Always take the short-term pattern you’re seeing in context. With that in mind, this bear flag isn’t a high-probability trade given support isn’t far below. Furthermore, the overall trend in recent months hasn’t changed, as this is really just a range-bound stock heading back toward key support. It might not hold, but trading is about probabilities, and they aren’t real favorable in this case for a move of more than about 3%.
In other words, always look to the left.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Follow TheStockBandit on Twitter or get our free newsletter to keep up!
Trading Roadblocks
September 29, 2011 at 8:12 am
Few things are as frustrating in trading as seeing a position start to take off, only to stop or reverse. When a trade hits the proverbial wall, it stops moving according to plan and quickly becomes dead money.
Nevermind the fact that you were long in the midst of an uptrend in the stock, and in a generally strong market environment. It’s time to bail out.
What if you had seen it coming?
Looking a little farther to the left on the chart can at times enable you to do just that. Sometimes we just get so fixated on the here-and-now pattern that we fail to recognize what might lie beyond. Overhead resistance looms like a roadblock, but without zooming out on the chart, you may never see it until it’s too late.
Due Diligence
As a short-term trader, I’m all about the recent price action. I care a great deal about how a stock has moved over the past 2-3 weeks, and every day of late. I’m gauging the volume, I’m looking for clean patterns, I’m designating my trading timeframe, and from there I’m able to project where the stock can go next if those patterns are confirmed.
But I don’t stop there.
Once I’ve identified a pattern, and made the corresponding game plan, my work isn’t finished. I still need to look at the bigger picture and take note of anything that might stand in the way of this stock running further. And I’m not referring to news which might break (although that’s particularly important during earnings season). What I’m referring to is potential resistance which the stock may have to contend with shortly after confirming the short-term pattern.
Exhibit A
For example, I recently discovered a bull flag pattern. I can project, based upon the pattern, where the stock could head to next if that pattern gets confirmed. However, a look at the bigger picture showed me a glaring issue with the trade: it didn’t have far to run before the next resistance would be encountered.
That congestion zone from a few months back was a major potential roadblock for the play. Although the short-term pattern could confirm, the stock may still not get through the next resistance zone. So, this is the kind of setup I’d only consider for a day trade rather than a swing trade, because the risk I’d incur for a swing isn’t in proper relation to the limited profit I’d make if resistance holds.
Here’s a look at the stock I’ve been discussing. I’ve erased the company name and ticker symbol, because it doesn’t matter. Rather, this is an example of how I evaluate potential plays.
A month from now, this flag may have confirmed and the stock might blow through prior resistance as if it were never there, but that’s not for me to decide. My job is to evaluate risk, and only put my money at risk when the potential for reward outweighs that risk by a considerable amount.
Taking note of potential roadblocks like this is one way I can ensure my risk/reward on each trade remains suitable. Occasionally I might regret not taking the play, but over the long haul, I’m preserving my capital for far better opportunities.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Follow TheStockBandit on Twitter or get our free newsletter to keep up!
Don’t Discount Daily Charts When Day Trading
August 31, 2011 at 9:16 am
The daily charts are where nearly all my trades originate. Whether I’m looking for a single-day move or one that lasts several weeks, I always at least take the daily chart into consideration.
Day traders often forget the value that the daily chart can bring. The conclusion is that it’s only suitable for swing trading or position trading, but the truth is that the daily chart can offer some good signals for entry and exit as levels are cleared or reached. Even better, those same levels can often add to your confidence in a day trade and help you stay in it.
Let me offer 3 examples from Tuesday’s session where the daily charts played important roles. On Monday night in the member area, I listed only 3 plays for Tuesday’s session, with each of them being day trade candidates. I’ll break them down one at a time with the initial setup, and then a look at Tuesday’s intraday chart where the daily level played a significant role.
First up was QIHU, which looked poised for a push higher after establishing both a higher low and a higher high in recent weeks. The pullback over the previous several sessions provided a clean descending trend line which I used as a pivot for getting long at $23.60. Here was the original setup:
QIHU pushed past that trend line and never dealt with it again, running initially almost 3% higher before pulling back but still holding above that same trend line:
Next up was GLNG, which had corrected and then settled into a multi-week narrowing consolidation pattern in the form of a symmetrical triangle. These patterns can break either way, and with a strong market and the upper trend line being challenged, I was looking long on a trend line break through $32.15:
GLNG triggered an entry as it cleared the $32.15 level, showing a nice initial pop followed by a pullback to test the breakout zone. To heighten the validity of the $32.15 level, the low of the pullback was $32.18, just 3 cents above it. From there, it ran again in the afternoon to clear the morning highs and get 4% beyond the morning trigger. Not bad for a few hours and no pain:
Last but not least was FSL, a little stock which had huge potential. It had just pulled back to test and hold the early-August closing low, and in recent days had stabilized just above that level. On Monday it saw expanding volume but only minimal progress as it edged past a descending trend line. I set a trigger for $11.25, which would be a multi-day high, to get long. Here’s a look at the pre-trade setup:
FSL triggered late in the day with a massive thrust higher once it cleared the $11.25 level, vaulting straight up to $12 to offer a very fast 6.6%. The move was fast and furious, but a quick payoff once the level was cleared:
A couple lessons from these trades…
A level is a level. Doesn’t matter if you found it on the daily chart or some other timeframe, the odds are it’s going to be evident across multiple timeframes. Recognize and respect that, because it could pay quite well. All 3 of these trades were winners, and each of them respected the level originally found on the daily chart.
Keep an open mind. Perhaps your preference for day trades is a 15-minute chart or a 30 or a 5-minute chart. That’s great. But keep an open mind about how trades might originate. Don’t resign the daily charts to something only multi-day traders consider. You’re missing out on several great opportunities per day by ignoring the daily charts.
Hopefully you found this walk-through helpful. If you want to know what I’m trading tomorrow, stop by the site and begin your trial to our stock pick service.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Strong Coffee
July 11, 2011 at 9:39 am
Truth be told, a Slurpee is the beverage that’s actually on my mind (happy birthday 7-Eleven), but if you’re looking at the charts of anything drinkable right now, it’s all about coffee.
Granted, it doesn’t quite have the same ring to it as the 1999 Bubble or the Crash of 1929 (or ’87), but the Great Coffee Rally of 2011 is on.
Names like CBOU, JVA, PEET, GMCR and SBUX have been ramping in recent weeks, putting them squarely on the radar of momentum players far and wide. This isn’t your typical grind (no pun intended) higher. These things are hotter than a car hood in the Texas summer.
Like quite a few other stocks, most of these could certainly stand to put in some rest here in the short term, but once that’s done, these are among the strongest (no pun intended) stocks in the market. Let’s take a closer look at each one.
CBOU – Nice pick up in not only activity, but of course in price as well since the higher low was established in early-June. Next levels are $14.30 then $14.50 to set this one free for higher prices.
JVA – The July run alone has been more like a quintuple shot of espresso than your average cup of coffee. We’ve also seen a 323% gain since June 6th – how’s that for a wake-up? Incredible short squeeze action here and way too extended at the moment to consider an entry, but certainly deserves a spot on the watch list for one of these days when it has settled down and created a new pattern.
PEET – More of a steady grinder, this one has actually built a couple of bases along the way up. It’s not in a place where I’d be getting long, but once it puts in some rest, it’s certainly one to revisit. Lighter volume than the others.
GMCR – At $95 per share, it’s a little rich (no pun intended) for some, but the uptrend is steady and this one continues to run. This year alone, we’ve seen 3 breakaway gaps which never saw attempts to get filled, serving as reminders that this one is very strong.
SBUX – The grandfather of them all might be kinda old, but he’s still got it! SBUX left a multi-month channel with a solid push higher a few weeks ago, tacking on nearly 15% over the past month. Currently it’s trying to put in a little rest, which is healthy to see. Once that’s done, don’t be surprised if another leg higher begins.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
RVBD at Key Resistance
June 30, 2011 at 9:32 am
Trading ranges or channels tend to stay in effect until, well, they’re no longer in effect. One name right now caught between support and resistance is RVBD.
This computer hardware maker rallied huge from last summer into the first part of 2011, and has since then been basing in a high channel. Rallies to resistance have predominantly been sold, while pullbacks to support have consistently been bought during this time. That’s the routine for a channeling stock.
With the stock currently at the top end of this range, you have to wonder if this is an opportunity for a downside reversal (particularly with the broad market short-term overbought), or perhaps a breakout failure and a subsequent pullback into the lower end of the range. No predictions, just an observation.
Here’s a look at RVBD, showing the trading range it has spent essentially 6 of the past 7 months inside of, with the only time outside the range between mid-Feb to mid-March:
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Timeline of a Short Squeeze
June 3, 2011 at 11:17 am
Active traders couldn’t help but notice the moves in VHC over the past couple of months.
Coming from relative obscurity in the 12’s, the stock caught fire from late-March into early-April, running to nearly $30 in just a few weeks. It then settled into a wide congestion zone as it did a good job of digesting that massive run.
We ended up with a very broad symmetrical triangle pattern, which also resembled a huge bull pennant when the preceding rally was included. Here’s a look at the run it made, along with the pattern I’m referring to:
Now, symmetrical triangles can break in either direction, but when found within the context of a trend, it never hurts to watch for an upside resolution. After all, these triangles are simply areas of indecision, and given the prevailing trend was up in this case, many were looking for that trend to continue once the period of indecision was resolved.
In mid-May, however, the stock began to falter as it undercut the lower trend line of the triangle. It appeared as though some further profit-taking was about to kick in, so the tide shifted. A hard breakdown was quickly embraced by short sellers aiming to profit from a move to lower levels. Volume picked up with the distribution, and multi-week lows were made. Here’s a look:
But as the stock began to bounce, the selling never resumed. Bulls sensed a failed pattern in the making, and they pressed the long side for another run. Bears, meanwhile, recognized they were trapped, and quickly began to cover their shorts. The resulting melt-up was quite impressive, as the stock tacked on more than 48% over the course of just 7 trading sessions. Here’s a look at that run:
As you can see, the day it peaked (June 2), it also reversed lower. Thanks to an exhaustion gap in an already very extended stock, we saw a last-gasp attempt at a push higher before the inevitable pullback kicked in, brought about by profit-taking.
Since then, the stock has corrected a bit further, and may have more room to rally in the days and weeks ahead – who knows. Rather than guess at what happens next out of this non-pattern, let’s consider some useful lessons from this short squeeze of the past couple of weeks and see what we can learn.
3 Takeaways:
- Obvious patterns don’t always play out as expected. The massive symmetrical triangle / bull flag setup had a ton of eyes on it, and had it broken out initially to the upside, it may have produced another ramp higher. Instead, it broke down first, catching many off guard – ultimately in both directions. Wait for your signal, and never underestimate the importance of keeping an open mind, and be ready to react to whatever comes along.
- When you determine you’re wrong, get out. That might sound elementary, but simply doing that could have avoided a lot of pain for those adding to their shorts as VHC reversed higher or simply not covering until the pain was too great. There is room in this game only for those who exhibit discipline, all others will fund the ventures of those with that trait.
- Always consider the other side of your trades. This is important on the front end, before you enter, but it’s equally important during your trade. Those caught leaning short in VHC needed to consider the opportunity the bulls were facing once the breakdown level was reclaimed ($23 broken on 5/16 and reclaimed on 5/26). Don’t take your eye off the ball, even after you’ve made contact with it. The home-run you think you’ve just hit might only be a single, and that’s alright. Weigh the alternative, and if you find yourself on the wrong side of the balance, call it a trade.
The next time you’re caught in a short squeeze or you see one developing, keep in mind how far they can go – it will either give you an opportunity to exit your short sale with less pain, or hop on board for a quick momentum ride.
What experiences or thoughts would you add to this?
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Trade Review: BIDU Breakdown
May 18, 2011 at 11:56 am
One setup I recently had success with was found in BIDU. Although the money’s been made on this trade, there are still some lessons we can take away, so let’s take a closer look at the trade as it evolved and see what we can learn from it.
The entire Chinese internet stock group had been weakening of late, with names like SOHU, SINA, NTES, and others beginning to struggle. This followed months of leadership, as these stocks made big upside runs by building bases upon bases. The momentum shifted a few weeks ago, and in every case these stocks topped prior to the market’s pullback. (That’s why they call them leaders).
BIDU did the same thing, having peaked in late-April ahead of the major averages like the NASDAQ. Once the overall market began to pull in, these stocks accelerated to the downside, providing further evidence of an important change of character. Having become oversold, they rebounded, but in a lazy fashion. This set up quite a few bearish patterns, with the rising wedge being found in BIDU. I highlighted this pattern for premium readers on the main site, looking to short BIDU upon a break of the lower trend line at $139.50.
BIDU broke that rising trend line, a day after its counterparts NTES & SINA. That offered not only a clean entry for a short sale, but also a stock which had potential to play catch-up on the downside.
I set a pair of targets for booking profits at $132 (yellow line in chart below) and $127.50 (red line on chart below), respectively. Target 1 was reached on day 3 of the breakdown, which was just slightly ahead of the 2/14 high in case it were to be tested. Target 2 was reached on day 4, and that level corresponded with the lower end of the same mid-February congestion zone.
While this stock eventually overshot my $12 per share profit target, it became oversold. Anytime a stock moves too far, too fast, it’s time to watch for a snapback. BIDU has done that in the past 2 sessions, but remains technically damaged. Here’s a current look:
This stock and the others in the group are currently bouncing from their lows, but they remain in a bearish series of lower relative highs on their daily charts. That is to say this bounce may get sold into again, so although this short sale is long since over, we have no evidence yet to support a lasting trend change. Until we do, these are stocks to watch for new short-sided entries to emerge.
A few takeaways:
First, clean patterns are the place to focus. They make it simpler for me to recognize when to be IN a trade, and perhaps most importantly, when to be OUT of the trade. Tighter, more well-defined patterns help me be decisive, and in this game, that’s huge.
Second, stay on top of the sectors. While it’s a bit harder these days to play follow-the-leader when it comes to sector moves, it can still be done with success. Take note of which groups are shaping up for advances or declines, and work the charts for favorable candidates.
Third, when you get your move, ring the register. Greed could have kept me in this trade for a little bigger move, but it also could have kept me in too long, leaving me now to wonder what to do on the current bounce. Blend the info you get by looking left on the chart along with the pattern projection to come up with an exit strategy. Then stick to it!
Fourth, (and this goes hand-in-hand with the previous note), sharper moves are more prone to reversal. When your targets are in sight (or already hit) and the move is getting a bit stretched, expect the rubber band to snap back at least part way. Tighten your stops, book gains, and generally start expecting an imminent exit. Pigs truly do get slaughtered.
Here’s to your next trade, whether a winner or loser, and your commitment to take from it what you can – whether it be profits, a lesson, or both.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Are you following me on Twitter yet?
