Wednesday, January 18, 2012

Price Action on WLK

MetaStock SPRS Series - Week 51 - TechniTrader® Stock Discussion for MetaStock Users: WLK - January 16, 2012
By: Martha Stokes C.M.T.

This week we are going to study the price action on WLK.

WLK has already moved up with velocity that is ending soon.

When swing and momentum traders find these stocks after they have already moved up, they often get discouraged or frustrated. But instead of getting irritated that you missed a great run, simply put the stock on a swing style watchlist and keep an eye on it for a few weeks. More often than not, stocks that ran with momentum once will do so again, once the resistance has been overcome.

I chose WLK to discuss and analyze this week because of the way it had moved.

Chart 1

On January 9th it formed a small springboard with rising volume and improving institutional indicators. Then, it moved up 3 days in a row with accelerating volume and price gains. The first 3 days of this run were velocity then on that 3rd day, the stock closed off of its high. You can see that volume formed what is called an “exhaustion pattern.” This is when volume hits the top of its chart after a fast velocity run. There tends to be profit-taking whenever this pattern forms.

Now, let’s also look at the way price ran so you can learn how to identify these patterns before they start running and get in early for the ride up.

Chart 2

The stock had formed a nice inverted modified H&S bottom with intermittent quiet accumulation. The stock also tested the highs of the bottom several times:once at the end of November with a common gap that filled easily, then again in early December with another common gap, and more gaps that filled in December.

Then, it retested the first support level out of the bottom, the highs of the neck. These held easily because sellers had lost dominance and the buy side was in control. The stock formed a short term round bottom to complete the intermediate term bottom. As it advanced on the highs of that resistance for a 4th time, the price patterns had changed.

The patterns were more consistent, volume was consistent, the candles were tightly bunched as sellers tried to sell down but lost intraday. The candles were steadily gaining toward the highs of the prior resistance and volume was building. There was plenty of energy beneath that price action.

This time, there were no false starts created by common gaps. The buying was consistent and not speculative as the run began.

The steady surge of buyers was followed by more buyers. Sellers gave way under the buying pressure.

A few things warned of the stock starting to lose steam, which required a tighter intraday stop loss to protect more profits than a regular swing style stop loss.

1. The stock closed lower in price in the 3rd day.
2. The stock’s angle of ascent was vertical and had run for 5 days.
3. A volume exhaustion pattern had formed.

With this information as a swing or momentum trader, it was time to switch to intraday support stop losses.

The final white candle overlaps due to profit-taking by some short term traders. Another tight stop loss OR a sell to close is now the choice a trader needs to make. With another exhaustion pattern on volume, and with it closing even lower than the prior day, the risk of profit-taking by large lots, which could topple the vertical angle of ascent quickly, means it is time to consider taking profits and moving on to the next momentum/velocity run.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner

©2012 Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

No comments: