Gauging the Strength of a Stock

MetaStock SPRS Series - Week 57 - TechniTrader® Stock Discussion for MetaStock Users: PETD - February 27, 2012
By: Martha Stokes C.M.T.

This week's discussion is on how to gauge the strength of a stock coming out of a short term bottom.

Many stocks run up so quickly out of a steep, deep V bottom that they then shift into a sideways pattern which becomes a short term bottom. Determining whether the stock will recover and resume its uptrend or whether it will get stuck and mired in a longer term sideways trading range, depends upon you recognizing the weakness or strength of price and volume action during the correction and recovery phases.


Chart 1

The PETD chart above shows the short term bottom formation that formed in the fall of 2011.

In 2009, PETD had dropped to a severe low of under $9 and rose quickly out of that bottom.

In October of 2011 it dropped to a low of $15 and then rose too steeply to sustain. It started a correction in November recovering from that retracement too quickly. Then once again correcting to form a slower downtrend and slower uptrend, back up to just below the previous highs.

The stock was traded on a short term basis during this period.


Chart 2

We can see that TTFF TechniTrader® Flow of Funds and volume have been increasing on the recent rise in price. But price has yet to clear the resistance from the October highs, so this is not a completed bottom at this time.


Chart 3

What we see in this stock is plenty of institutional TRADER activity rather than institutional INVESTOR activity. And this is no surprise as the stock has a 96% institutional ownership. That means only 4% is owned by smaller lot investors.

All of the trading activity for this stock is between institutions, small funds, medium sized funds, large funds and giant funds which are all moving around in this stock.

The short term trading aspect makes it speculative with steeper angles of ascent and descent than if this stock was being quietly accumulated.

Understanding who is trading or investing in a stock helps to define how price and volume will behave and whether the stock will be able to break out to the next upside level or be stuck within the range.

PETD’s all time high is around $78 so it is about half way to its all time high. The deep correction of 2011 has reset. But in a value oriented market, the company must prove it can grow and expand otherwise the stock will stay within a range rather than trend upward.

Keep this stock on a watchlist to study at a later date.

For now it lacks the volume to sustain a strong momentum move upward, and it must overcome the 2011 high resistance.

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
http://technitrader.com
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.

Low Bottom Formations

MetaStock SPRS Series - Week 56 - TechniTrader® Stock Discussion for MetaStock Users: The Long Term Sideways Bottom QCOM - February 20, 2012
By: Martha Stokes C.M.T.

Many technology stocks that were big movers during the last few years of the bull market of the 90’s and early 2000 have been stuck in a trading range low bottom formation for more than a decade. Now these stocks are beginning to breakout of that range and move upward.

As these stocks reinvent and recharge their companies with new technology, their stocks will once again enjoy good growth.

QCOM is a stock that has been stuck in a low range between 30-55 since 2004. It had collapsed to a low of $12.25 after having been at its all time high in 2000 at $93. It recently moved up beyond the limitations of the 30-55 trading range and is holding well at around 62.

This stock now has the potential to regain more of its lost value from 2000 as it reinvents and starts new technologies that will spur growth for the company.


Chart 1

Instead of a compression pattern out of this trading range QCOM created a short term bottom formation. This provides ample support for the stock as it continues to move upward. Note the consistent quiet accumulation going on over the past couple of years.

On a daily chart we can see the beginnings of a platform after the breakaway gap. Although this breakaway gap is rather small it has cleared the resistance monthly highs and has moved up slightly.

This should provide a good position style entry later on as this stock builds more energy.

As a big tech stock with huge outstanding shares, it will tend to move more slowly than a smaller cap stock with smaller outstanding shares.


Chart 2

In the Chart above, TTVA TechniTrader® Volume Accumulation shows a mild decline as would be expected as the stock gapped and the giant funds managers are in a holding pattern. Without speculation from institutional traders, the volume slips during a consolidation or platform. TTFF TechniTrader® Flow of Funds shows a steady flow of money into the stock during the later part of the bottom to the breakout.


Chart 3

In the Chart above, the TechniTrader® RSI/RSI hybrid indicator is not designed to expose overbought oversold but to reveal the strength of price action comparing it to prior price action within the timeframe designated, in this case about 1 month of trading days activities. Since narrow consolidations and platforms are an uptrending pattern 99% of the time, oscillators are not as effective for analysis purposes. Oscillators work during trading ranges and wider sideways best.

The lower comparison is between QCOM and NASDAQ which shows QCOM is outperforming the Nasdaq composite index. I use the NASDAQ composite index rather than the S&P500 because it has been the best performing index for several years far outperforming the Dow and S&P500, and tech stocks are where most of the action has been lately.

By using the NASDAQ as the basis for comparison it provides a far more accurate picture of how well this stock is performing against the best performing index at this time.

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
http://technitrader.com
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.

A Problematic Area for Traders: Stock Bottoms

MetaStock SPRS Series - Week 55 - TechniTrader® Stock Discussion for MetaStock Users: MPWR - February 13, 2012
By: Martha Stokes C.M.T.

This week I want to focus on an area that can cause problems for many traders as stocks complete or move out of bottoms. This is especially problematic on the short term and intermediate term bottom.

Let's first define what constitutes a "completed bottom."

A completed bottom is when a stock has overcome the first major resistance level and has risen in price above that resistance level, AND has been able to sustain that price gain without falling back down below the resistance.

MPWR is our stock for this week. We are studying this stock because it has formed a typical bottom formation recently.

What happens for most stocks as they trend down for a period of time is the first attempt at a bottom fails. This is very common. We can see that in March of 2011, this stock made a decisive attempt to bottom. It dropped to a lower low and then attempted to rise above the downtrend peak of November 2010. However, it failed to overcome this primary resistance level. MPWR proceeded then to move deeper into a much steeper and more defined bottom. You can see that the distribution continued heavily in December – February 2011, but in May- August the distribution pattern wanes, indicating early on that sellers have been depleted. This paves the way for the "shift of sentiment" on TTQA TechniTrader® Quiet Accumulation that we have discussed before. This occurs in October as heavy accumulation commences. What we see is a stock that runs up a few points, then sells down due to novice sell shorters thinking this is merely a bounce. Since most traders do not use accumulation/distribution indicators, they can't SEE that the shift of sentiment has occurred. So they are selling against the tide of institutional buyers. This causes some panic and the stock climbs vertically as buyers continue buying and sell shorters try to cover their shorts quickly. The stock continues to move with momentum energy during December with minor retracements and consolidations as it moves up.


Chart 1

In late January, the stock attempts to test the strength of the resistance level from the prior failed bottoming highs. These highs are where the true bottom completes. This is where the stock defines if it has sufficient buyers to push on through and continue an uptrend over time.

The lower line I have drawn around 12.50 is not where a bottom completes. This is the volatile area where the shift of sentiment occurs. This is where smaller lot traders selling short get whacked by big funds moving in quietly buying the stock as it moves sideways. Since these big funds prefer to control their entry price, the sideways action occurs. Then the stock gets noticed by HFTs and other pros, and the momentum runs occur.

Now the stock is at a crossroads. It must move above the resistance highs of the failed bottom and then hold and maintain those gains for a true bottom to be completed.

Many retail traders make the mistake of thinking the bottom is complete on the first momentum run. It is not. This stock could dip down to retest the support level from that initial move out of the extreme low.

Once the stock has completed the bottom, the trendline pattern will change again as a new group of buyers will begin to dominate as it begins its true trend. But for now, the bottom is not complete and a retest could occur.

If you are a swing trader, you can trade the shift of sentiment momentum runs. If you are a position trader, you must consider waiting until the bottom completes; otherwise, you must keep a very wide stop loss to avoid being taken out at a loss, only to watch the stock move up and begin its trend.

Learning to properly identify when a bottom is complete helps both swing and position traders enter stronger stocks that will move well for longer periods of time.

Trying to trade while the stock is retesting, shifting sideways and is volatile as it bounces around the resistance of the failed bottom high, tends to create more losses than gains. Always use the best entry for maximum profits. Do not worry about 1-2 points. Focus on the entry that will net the highest profits with the lowest risk. Trying to buy a stock that has not completed the bottom is a significantly higher risk.

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
http://technitrader.com
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.

Shift of Sentiment Patterns

MetaStock SPRS Series - Week 54 - TechniTrader® Stock Discussion for MetaStock Users: GMCR - February 6, 2012
By: Martha Stokes C.M.T.

One of the recent patterns that has been occurring often is the “shift of sentiment” pattern that indicates early a final bottom has been reached. We are seeing many stocks completing bottoms with runs and gaps in the past few weeks.

The “shift of sentiment” patterns are very easy to recognize. They tend to form before the stock actually starts moving up, and often signal a period of quiet accumulation followed by stronger upward price action out of a bottom.

GMCR has such a pattern.


Chart 1

TTQA TechniTrader® Quiet Accumulation has red bars in October and November indicating dumping. The suddenly the bars change to green for several days and price stabilizes. Then the green bars fade to grey. This is quiet accumulation going on. The largest funds try to hide their activity from speculative traders, high frequency traders, and those traders that disrupt price.

This could easily turn into a sudden run or gap up for this stock.


Chart 2

TTVA TechniTrader® Volume Accumulation shows a big surge of buying in November and TTFF TechniTrader® Flow of Funds finds a bottom in mid-October. TTRSI TechniTrader® RSI is steadily rising indicating the sideways action is gaining strength.


Chart 3

What else do we see about this stock that is important?

GMCR likes to gap. Stocks have tendencies based on who buys that kind of stock. Some stocks rarely gap while others gap constantly. This is a stock that gaps frequently. That means as a trader, if this stock looks interesting you should plan that it has a high potential to gap. Stocks tend to rest a bit after a shift of sentiment then bolt upward to complete the bottom.

If this stock does gap, it will create an island gap, which is one of the strongest gap series that can form on a stock chart.

When the stock was moving up, the gaps were consistent with the platform building patterns. Clearly the stock gapped every time Earnings were to be or were announced. Then it formed a top and slid downward to the stronger support level. Now it appears to be ready to complete its bottom and resume an uptrend.

“Shift of Sentiment” patterns are becoming more and more prevalent in the past year. Watch for them and monitor a group to see how price behaves after the “shift of sentiment pattern” occurs.

To be a consistently successful trader you need to continually adapt to the changing trading conditions, and this is one of those changes. Sentiment shifts abruptly nowadays instead of more slowly.

Use the TTQA TechniTrader® Quiet Accumulation to find these shifts of sentiment, build a watchlist, and then you will be able to trade these types of patterns more successfully.

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
http://technitrader.com
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.

MetaStock U explores Candlestick Patterns

Candlestick Patterns Following Patterns Produce Profitable Consistency - January 31, 2012
By: Stephen Bigalow

Candlestick analysis is the epitome of technical analysis. If the definition of technical analysis is to recognize price patterns, candlestick signals and patterns exemplify that process. The basis of candlestick analysis is the visual identification of investor sentiment put into a graphic depiction. The identification of individual candlestick signals creates great profitability from assembling candlestick signals into price patterns. The effectiveness of candlestick signals and patterns are the result of one basic premise. Investor sentiment reacts the same way during a specific area of a trend over and over. Mastering candlestick analysis results in being able to exploit price movements that are going to reoccur with a high degree of probability. Fortunately, mastering candlestick analysis is relatively easy. It is merely common sense investment practices put into a graphic depiction.

Producing profits from candlestick analysis is relatively easy. It is learning what to expect after the appearance of candlestick signals in specific areas of a trend. Witnessing a candlestick buy signal in oversold condition produces a high probability condition resulting in an uptrend. Conversely, witnessing a candlestick sell signal in overbought area creates a high probability that the sellers are starting to take control. Obviously there is some credence to these observations, otherwise we would not be looking at candlestick signals hundreds of years after they have been developed. If an investment method does not work, it is not going to stay around.

Understanding the investment psychology built into each individual signal allows for the identification of high probability/high profit candlestick patterns. The same conditions apply to candlestick patterns as they do to candlestick signals. There is going to be expected results that should occur a high percentage of the time. Knowing what the expected result should be permits a candlestick investor to participate in high profit moves. An added advantage becomes the ability to anticipate the next move after the anticipated result of one pattern going into the next pattern.

Steady price trends as witnessed in the first weeks of 2012 allow for price patterns to set up and perform. A predominant candlestick price pattern that produces strong profits is the Fry pan bottom. This pattern develops as a slow indecisive down trending move. It eventually has a slow flattening period, followed by a slow uptrend in price. The slow uptrend is the result of investor sentiment starting to build up confidence. Identifying a Fry pan bottom set up has major advantages. It allows an investor to anticipate when the exuberant buying will come back into the price movement. This usually occurs at the same level as when the pattern first started developing. Unlike looking for candlestick reversal buy signals in the oversold conditions, a Fry pan bottom breakout will usually occur when the conditions have moved back up into the overbought area. As can be seen in the VMED chart, a slow rounding Fry Pan bottom pattern produced the expected results, a strong bullish price move.


Chart 1

Knowing the conditions that signal a price break out, the candlestick investor has the opportunity to make big profits in a short period of time. However, the analysis does not end upon seeing sell signals at the top of the strong price move. Profits can be taken but the chart should still be maintained on the watch list. The next price pattern can be anticipated.

The J hook pattern!

The J hook pattern has a prerequisite: the initial element of a J hook pattern is a strong price move. This is what has been produced by a Fry pan bottom breakout. Upon witnessing and acting on the first sell signals after the strong uptrend keeps the chart on the watch list due to the anticipation of a J hook pattern setting up. The advantage created by individual candlestick signals allows for an accurate identification of a J hook pattern.

The J hook pattern is created after a strong price move, then selling comes into the trend. Candlestick investors have the advantage of identifying the type of selling that is occurring. Each of the major candlestick signals has specific characteristics. The Doji, the spinning top, the hammer, and the inverted hammer signals represent indecisiveness. After a day or two of pullback following a strong price move, if indecisive candlestick signals start to appear, it can be assumed there is not any great strength in the selling sentiment. After a few days of indecisive signals, if some bullish candlestick formations start to appear, slowly moving the price back up, it can be assumed the recent selling was merely profit-taking during an uptrend. This new bullish action now creates a J hook pattern set up. As with all candlestick patterns, there is now an expectation of what the next price trend will do. If wave one is a strong price move resulting from the Fry pan bottom breakout, wave two becomes the profit-taking area. Wave three becomes the next element of the J hook pattern. It will have an anticipated price move of at least the same magnitude as wave one.

Knowing the expectations of candlestick patterns produces a very powerful investment process. It dramatically reduces the emotions involved with investing. Knowing that price patterns occur due to the reoccurring phases of investor sentiment produces opportunities to take advantage of price movements with putting the probabilities in our own favor. Having expectations of what the next price move magnitude should be permits an investor to create investment strategies that maximize profit potential. This may include buying or selling calls or establishing bullish spreads. The probability of expected results occurring allows for calculated trade strategies versus emotional decision making.

An investor does not have to have extensive technical trading knowledge to utilize candlestick signals. The strongest aspect of candlestick analysis is its visual characteristics. Each signal and pattern has common sense investment criteria built into them. Where most investment program promotions try to sell investors on their newly found "secrets" for extracting profits from the markets, utilizing candlestick signals is completely the opposite. There are no secrets about candlestick analysis. Making large and consistent profits is merely learning how to use candlestick analysis correctly.

Happy Trading,

Stephen Bigalow

About the Author
Stephen W. Bigalow is author of Profitable Candlestick Investing, Pinpointing Market Turns to Maximize Profits, High Profit Candlestick Patterns and Candlestick Profits, Eliminating Emotions is also principal of the www.candlestickforum.com, the leading website provider of information and educational material about Japanese Candlestick investing on the internet. Over 28 years of extensive study and utilization of candlestick analysis has produced an array of easy-to-learn educational material about Candlesticks. As one of the leading Candlestick experts in the nation, Mr. Bigalow, through consulting with major trading firms, has developed multiple successful trading programs from the day-trader to the long-term hold investor.