Monday, February 27, 2012

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
MetaStock Partner

©2012 Decisions Unlimited, Inc.

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