3SOF

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I am not as familiar with the consolidation patterns on these larger stocks that have had GREAT runs.  Your post openend my eyes AGAIN (applaud) to the long possibilities, if it breaks 61 my first target would be around 65.  Will keep watching

Joe,

I had a similar situation in early August:

1. "Mystery Stock" (below) had a 600%+ gain over a two year period.

2. It MADE a Bearish pattern target in April (starting a Bearish trend?).

3. But, it also MADE a Bullish target at the end of July.  Hmmm-mm...  ???

4. It looked "Double Toppy" here (early August).

5. That huge gap from mid-July looks like it's begging to be filled.

6. Technicals are weakening, e.g. MACD had a cross below its signal line a few days ago.

Questions/Thoughts That I Pondered:

1. Although fundamentals looked good, a lot is priced into a 600% gain.  :o

2. Shorting is low risk and nice reward if the gap gets filled.

3. Any chance of much upside after such a huge gain (600%)?  If I'm stopped out on the short, should I cover and go long?

Got any thoughts on whether to play it?  How to play it?  Etc. (all others welcome!)

EDIT: I'll 'reveal" the Mystery Stock tomorrow.   ;D  >:D

;D Thanx Melf for keeping things Light and sharing info!  I look forward to seeing which stock it is!!

These are in similar boats:  AAPL and AKAM  bullishly hovering above sizable gaps and PNRA threatening to fill the GAP to the upside

Speaking of Gaps and Gaps getting filled check out the BAB chart!!

Melf if you have a minute could you share some of your technique/strategy.  I appreciate how you said that you do not want to brag about trades (on the GNBT thread) Yet you made a great day trade there and i am curious how you watch so much throughout the day?  Do you have an automatic trading system, filter and screeners ( I have wealth-lab and am slowly studying it, but should put more time there instead of buying and selling currently...)  Are you using multiple monitors/computers to keep track of intra-day candle patterns.  Do you find intra day patterns to be as strong/stronger than longer term patterns?  Do you use RSI at all (above 85 and blow 20 have been solid reverse plays for me, I am trying to build a screener that will identify these market wide for me...)  Thanx in advance 

oh yeah one more ?  On PNRA you mentioned that it finished a H+S, that was a perfect year long pattern that i can see...  does the completion of a pattern signal the next move to you at all or is it now a wait and see the next development...  Earnings are solid, but the chat rooms are split long and short on PNRA...
You might like ABBP

Cheers Joe

Quote from: joet on September 02, 2006, 05:11:44 PM
;D Thanx Melf for keeping things Light and sharing info!  I look forward to seeing which stock it is!!

joe,

You'll get a kick out of this when you see the "Mystery Stock."  What I didn't tell you is that the chart that I showed you was from August of last year because it would have given the stock away, and because it also didn't matter, for the purposes of our discussion about ATI.

If you go back to the first post on this Mystery Stock, to what the chart looked like, and  to the questions/thoughts that we had when we looked at it, I think you'll see what I mean about the possibility of ATI simply being in a Bullish Continuation pattern in the current tme-frame.

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Melf if you have a minute could you share some of your technique/strategy.  I appreciate how you said that you do not want to brag about trades (on the GNBT thread) Yet you made a great day trade there and i am curious how you watch so much throughout the day?

Actually, I can't watch many at one time.  On the Scottrade screen, they have a sheet where you can list 20 stocks, but you can have several sheets, and switch back and forth.  I mainly watch the 20 on my first screen, the "front burner," if you will, and then of those 20, I watch several a little more closely, if they're near an entry or an exit point.

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Do you have an automatic trading system, filter and screeners ( I have wealth-lab and am slowly studying it, but should put more time there instead of buying and selling currently...) 

No.

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Are you using multiple monitors/computers to keep track of intra-day candle patterns.

No.

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Do you find intra day patterns to be as strong/stronger than longer term patterns?

I'd have to say no, that longer term patterns tend to be more reliable.

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Do you use RSI at all (above 85 and blow 20 have been solid reverse plays for me, I am trying to build a screener that will identify these market wide for me...)  Thanx in advance 

Scottrade doesn't have any indicators for intraday charts, other than volume.  I don't think I'd use them anyway.  I'm mainly looking for patterns and specific prices when I look at an intraday chart.

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oh yeah one more ?

Okay, but you're already well over your limit.  ;D  >:D   

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On PNRA you mentioned that it finished a H+S, that was a perfect year long pattern that i can see...  does the completion of a pattern signal the next move to you at all or is it now a wait and see the next development...

That's a great question.  In my view, it's definitely a "take at least some profits" when targets get MADE.  Particularly if several get MADE.   I can't give you a percentage, but I'd say that more often than not, when all of the targets get MADE, or a couple of targets in the same price area, like KOMG in the low to mid-$34s (see my posts in that folder recently), you're at or close to a reversal point, or at least a nice bounce (KOMG bounced over $39, right near former support at 39.16).

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Earnings are solid, but the chat rooms are split long and short on PNRA...
You might like ABBP

Cheers Joe

"So many stocks....soo-oo little time."

Quote from: joet on September 02, 2006, 05:11:44 PM
Do you use RSI at all (above 85 and blow 20 have been solid reverse plays for me, I am trying to build a screener that will identify these market wide for me...)  Thanx in advance 

Joe,

Regarding RSI, I don't use any particular number for overbought or oversold, but rather, I use sequential Fibonacci measures of RSI (13...21...34...55...89 and 144), and look at how they are positioned with reference to each other, much like the 50 day moving average of a stock being above the 200 day moving average.  Then I view that in the context of what the price chart itself is doing.

Is there a pattern?  Is there identifiable/validated support or resistance?

Most textbooks seem to use 70 and 30, or 75 and 25 for overbought and oversold RSI.  Any number you want, like your 85, is fine to play with, to see if it works.

Here's the problem with using any number, though:  In stocks that are in a strong trend, it won't work.

"The most bullish thing that a stock can do is to get overbought, and stay overbought."

Conversely....

"The most bearish thing that a stock can do is to get oversold, and stay oversold."

Witness APPL, in the Autumn of 2004.

Using your 85 RSI reading for "overbought," it got overbought in October, at 25.31.  RSI fell to 75 (still overbought the way that most technicians use the indictor...70-80 for overbought), but AAPL rallied to 30.67 and got overbought again (above 85) in November, then went into a consolidation phase.

If we shorted 30.67 on the overbought reading of 85, we never had a chance to get out with a gain, or even with a break even.  The low of the consolidation phase was 30.87.  :(

And, if we stayed short on either of those overbought readings of 85, justifying our position because we felt that the stock had to sell off because it was sooo-oo overbought....

YIPES!!   :P  :(  >:(

Using any indicator, or set of indicators, to determine whether or not to buy or short a stock can get us into big trouble if we don't view them in the context of what the chart is doing.

For example, we will read, "AAPL is way-y-y overbought, and RSI has given a sell signal (or MACD has given a sell signal, crossing below its signal line) or some other indicator "said" sell...." 

WATCH OUT!

If a stock is in a strong trend (like your AKAM), we don't want to be too quick to short it, just because some indicator got overbought, and "said" to sell.

Indicators don't "say" anything.  They just give us a reading, and the "suggestion" to sell.  The indicator has no idea what the chart looks like.  We, as technicians, have to interpret whether or not we think that it's a valid sell, then look at the risk/reward if we take the signal, etc.

Hope that helps, not only with RSI, but with using other indicators as well.

Melf you taking up a short position in AAPL or already have one? Im still holding my short position in AAPL avg. around 64s. I believe AAPL is setting up for a big fall now all it takes is the straw that breaks the camels back (the right negative news). A minor correction of the NAZ would help push AAPL closer as well to filling the GAP in the 50s.

Time for bed, but having too much fun reading all of you posts   :D

Are you going to keep us guessing...  after your clues today and your interest in AAPL i figure that is the Mystery sstock and hidsight says buy it last year... but this year???  Crammer thinks we will see 80, I feel that is a possibility but i also feel that the gap (similar % as last years)  will get filled this time around... as you pointed out AAPL is sitting on huge gains... Time will tell

Sooo ATI Are you in this week Long?  If it closes above 62 i may open a position.... Metal head had some convincing arguments that ATI should see 100, and we have had some nice accumulation... let us know if you enter ATI.  I still think it wil be a good short if it closes under 55

(not sure you noticed my previous post i mentioned APPB, a resturant) I know soo may stocks soo little time  ::)  Reverse Head and Shoulder... 24 in play??
Keep them comming  
Cheers Joe

PS not in bed yet... found an abandoned baby on the NGAS chart, i remember you bringing up the formation back on the ZMH thread...  think the NGAS baby will bet rescued, support at 8.5 seems to be holding and the year long trend id up...

[nullz and joe,

I'll post a current chart of AAPL in the "APPL Of My Eye" folder.  I only put it in here as a general example for joe of a bullish continuation pattern in a big cap stock that was long-term bullish.

Quote from: joet on September 04, 2006, 03:33:43 AM
Time for bed, but having too much fun reading all of you posts   

Are you going to keep us guessing...  after your clues today and your interest in AAPL i figure that is the Mystery sstock

Right, it was AAPL.   ;D  I posted the name at the top of the last chart.  You must have been too sleepy to see it.   :D

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Crammer thinks we will see 80

Yeah, he gave it the "See ya at $80" BOOYAH at least twice, that I saw.  Don't know if he still thinks that.

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I feel that is a possibility but i also feel that the gap (similar % as last years)  will get filled this time around... as you pointed out AAPL is sitting on huge gains... Time will tell

That's certainly reasonable, but we don't want to get in the trap of taking a position because of what "we think" the stock should do.  For example, we've all seen "piece of crap" stocks that never earned a dime, and probably never will earn a dime, have HUGE percentage gains, despite the fact that "we don't think" that worthless stocks should rally like that.  ::)

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Sooo ATI Are you in this week Long?

No, I've never looked at it before this weekend.  It came up as a buy on my Equis MACD Histogram Scan.

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If it closes above 62 i may open a position.... Metal head had some convincing arguments that ATI should see 100, and we have had some nice accumulation... let us know if you enter ATI.  I still think it wil be a good short if it closes under 55.

Metal head's posts in the ATI folder were interesting (Applauded).

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(not sure you noticed my previous post i mentioned APPB, a resturant) I know soo may stocks soo little time  ::)  Reverse Head and Shoulder... 24 in play??
Keep them comming 
Cheers Joe

No, I didn't look at APPB.  Quit giving me more homework, will ya?  ;D  >:D

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PS not in bed yet... found an abandoned baby on the NGAS chart, i remember you bringing up the formation back on the ZMH thread... think the NGAS baby will bet rescued, support at 8.5 seems to be holding and the year long trend id up...

Hey, you remembered the Abandoned Baby!  :D

Yeah, NGAS hung on last week.  That 8.50 area is:

1. The bottom of the Symmetrical Triangle

2. The top of the Kumo (Cloud)

3. The 50DMA

Trading Lesson: Taking Small Losses

Quote from: Melf Elf on September 07, 2006, 07:23:46 AM
As it stands, though, my assumption that the bottom of the pattern was in, was incorrect, and I'd be sitting in the trade "hoping" that I would end up being right about the pattern.  That's dangerous.  The bottom of the pattern was my "safety net," and it wasn't support.  This could go lower than I expected.

I took a 2% loss on the trade.

My 2% loss in BDCO last week now would be a 7.3% paper loss had I not sold the trendline break when I recognized that my assumption about the pattern was incorrect.

BDCO still could end up bullish, but it also could end up testing its 200DMA at 3.80, in which case I'd be sitting on a 22.6% paper loss, wondering if tha-at was the bottom.  UGH...

Taking these small losses when a trading plan goes wrong can save a lot of headaches.

KUDOS
Plan the trade and trade the plan!!   I am working on adhearing to this with exit plans.
keep up the great posts Melf  Aplaud

Quote from: joet on September 11, 2006, 08:02:07 PM
KUDOS
Plan the trade and trade the plan!! I am working on adhearing to this with exit plans.
keep up the great posts Melf Aplaud

I appreciate that, Joe.  My 2% loss in BDCO now would be a 14.3% paper loss at yesterday's close of 4.21.  UGH.

Some of my best trades are when I take small losses and not allow them to turn into big losses.

Trading Lesson: Selling Breaks Of Key Support

I did a fairly lengthy analysis of FPP in that folder on The Stock Picking Board on July 7, if anyone cares to read it for TA study.

Dominant Bearish Features:

1. The break of the Descending Triangle, and key 6.75 support.

2. The Bearish Island Reversal in April


3. The break of 6.04 support, and the failed re-test of that, at 6.00, in early June.

4. The break of 4.80 - 4.81 support, in mid-June.

When I posted my July 7 analysis, there was a "possible" double-bottom at 4.25 - 4.35, but it's what I call "skimpy."  Very narrow, in terms of width.  Only two weeks of trading. 

If we buy FPP, or worse, if we "double down," we're buying a stock just below a "brick wall" of resistance.  EVERYTHING above, from 4.81 on up, is resistance.

Yes, stocks like this "can" go higher.  No, long postions against that kind of resistance are not favored because it is "fighting the trend."

Doubling down in this situation is begging for trouble.

FPP is down 42.6% since July 6, 2006.  The Descending Triangle target of 3.33  MADE yesterday, September 11, 2006.

Quote from: Melf Elf on September 12, 2006, 05:11:56 AM
FPP is down 42.6% since July 6, 2006.  The Descending Triangle target of 3.33  MADE yesterday, September 11, 2006.

At today's low of 2.55, FPP was down 54.16%, just from the July 6 analysis.  UGH. 

Trading Lesson:  "Don't Fight The Trend."  Yes, it hammered today, but....UGH.

Trading Lesson: Cheap Can Get A Lot Cheaper.

It's tempting to buy stocks like CPST, becasuse they are "oversold," or because they are "cheap."

UGH.

The breakout above the black down trendline, generally, is NOT a breakout.  It's a "break above," but usually is meaningless in a stock with this much overhead resistance. (See post on the Trading Ideas Board, if interested).

"Skimpy" bases, like CPST had at 1.74 - 1.75, below TWO levels of heavy resistance, aren't favored to succeed.

Again, "The Trend Is Your Friend."

There's a reason why cliches become cliches, but we still fight the trend.   :(

From the break below 2.23-2.25 KEY support, CPST, at today's close, is down an additional 31.8%, on top of what it lost to that point!

UGH.

Try to avoid these horrible charts.

Thanks again Melf, Your posts are giving me ooodles to study.   With NVAX i may be holding one of these...  need to examine it with my one charts at home tonight, it recently re tested 4.20 but is back down to 3.6  However, the past 3 sessions have seen lower shadows but only closed slightly lower which seems like a reversal possibility.  If 3.52 or so holds than we will have some consolodation, with higher lows and more promising to look above 4.20.  If 3.30 breaks to the down side NVAX is in a world of hurt...  Thoughts?
Also on the possible up side, the selling volume has been very llight and the fall seems to be good for Bio stocks.

Are you shorting FPP or CPST, (on paper?) at these low levels?   Following trends we want to take a bite out of the middle and would you agree that these two if not at their bottom are to far over sold to trust the trend in a short trade!
Cheers Joe

Quote from: joet on September 16, 2006, 05:09:05 PM
If 3.52 or so holds than we will have some consolodation, with higher lows and more promising to look above 4.20.  If 3.30 breaks to the down side NVAX is in a world of hurt...  Thoughts?

Joe,

My apologies, but I'm using this thread for "general purpose" discussions, using the stocks that I've mentioned to apply the particular points made, to stocks, in general.  If I start focusing on stocks that others are interested in and spending the time to analyze them, I'm going to get myself into trouble, time wise.  I hope that you understand.  ;)

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Are you shorting FPP or CPST, (on paper?) at these low levels?

No.  Neither of my brokers will allow a short under $5.

Quote Following trends we want to take a bite out of the middle and would you agree that these two if not at their bottom are to far over sold to trust the trend in a short trade!
Cheers Joe

Completely agree.

Using FPP as an example, good places to short were:

1. The break of 6.75 support

2. The re-test of that break, although that trade got a little hairy on the Bearish Island Reversal fakeout to the upside.

3. The break of 6.04 support.

4. The failed re-test of 6.04, that failed at 6.00

5. The break of 4.80 - 4.81 support

6. The break of 4.25 - 4.35 support

At 2.90, this would be "shorting into the hole."  From the first break of support at 6.75, the stock already is down 57%.  The trade is much too far gone, in my opinion.

Be aware, also, that these thinly traded stocks can be very difficult to short.   Not only are shares often not available to short, it's difficult to get decent fills.  If you put in a limit order, they tend to move the Bid and Ask away from you.  If you put in a market order, they can fill you wherever they want, and the fills can be really, really lousy. 

I'd suggest shorting more liquid stocks.  The closer to average daily volume of 1,000,000 shares or more, the better.  Much easier to enter and to exit.

Hey Melf,
           First of all, thanks for all the work you have put in to improve the site.A quick question. In you opinion Which is the best technical signal that has better than say 70-80% results and how do you (MELF) use it, I would certainly appreciate it if you wouldn't mind sharing it.
Thanks AK

Quote from: akclide on September 18, 2006, 10:18:43 AM
In you opinion Which is the best technical signal that has better than say 70-80% results and how do you (MELF) use it, I would certainly appreciate it if you wouldn't mind sharing it.
Thanks AK

akclide,

If anyone has found a technical signal that has better than 70-80% results, I'd like to know about it, too.   :D

I don't use anything mechanical, like "Always buy MACD crossing the zero line," etc.  I don't have the programming knowledge or knowledge of statistics to conduct any kind of research, but after years of studying many, many charts and indictors, I can tell you that I've stopped searching for "The Holy Grail" of indicators.  ;D

Probably everyone who is new to technical analysis tries Stochastics and Relative Strength, etc., and finds out that often, they don't work.  For example, "Stochastics went above 20...or 25...or 30, so it said BUY."  Then, the trade doesn't work out!  >:(

Here's the problem: the indicator doesn't know what the price chart looks like.  Was the buy signal given after the chart had formed a nice bullish base, or was the buy signal given when the stock was ready to smack right into resistance? 

Big difference, right?

So, if we say, "Buy signals in Stochastics only worked 55% of the time, so it's a lousy indicator,"  Stochastics might want to say back to us, "I might work a lot better if you'd stop using my signals that are against the trend."  ;D

That would take a lot of research to conduct a study of under what circumstances we should take signals.  Should it be at least a 4 week base?  A six week base?  Should there be a discernible pattern?  Should we wait for a Stochastics "buy signal" AND a pattern or trendline breakout?

More questions than answers, I realize, but we can see why "it ain't simple."  But, I also try to make it as simple as possible, and not use too many indicators.  I primarily use my Fibonaccii measures of Relative Strength, MACD, the Ichimoku Kinko Hyo charts, and the rest is combining those with chart pattens, trendlines, and support and resistance.

Example: GIGM, using the 13/21 RSIs (apologies that this chart is difficult to look at). 

I put vertical lines to show when the RSIs came into synchronicity (readings within about a point of each other), and what the chart was doing when the signals were given:

1. March 31, 2006 - Bullish Synchronicity - GIGM re-tested 5.62, which was former resistance, and held, so "former resistance now acted as support," as it should.  The close was 5.68.  The high on the day was 5.85, so the 13/21 RSIs would give a "buy pivot" signal the next day if 5.86 got printed, a penny above the prior day's high.

The 13/21RSIs don't have a clue what the chart looks like.  We do. 

When 5.86 got printed the next day, do we want to take the buy signal, or not?  Yes.  The trend is bullish.  The chart looks fine.  GIGM printed the 5.86 the next session, April 3, and closed on the high of the day, at 6.30.

2. April 11, 2006 - Bullish Synchronicity again, which I view as a "repeat buy signal" when it occurs this close in time.  High on the day was 6.60, so a print of 6.61 the next session would be another "buy pivot."  Do we want to take the signal, or not?  Yes.

3. May 15 - Broken H&S Top in the 13/21RSIs.  Sell signal.  What does the chart look like?  Parabolic rally into a Bearish Rising Wedge.  Do we want to take the signal and sell the break of the Bearish Rising Wedge, or sell short a re-test of the broken Bearish Rising Wedge.  Yes.

I'll skip the remaining signals since this is so long, but you get the idea, about combining signals from indicators with what the chart itself is doing.

Hope that helps, akclide.  Good luck!

NOTE: I didn't buy any of the three bullish signals in this indicator in August because of the downside reversal at earnings on heavy volume, and because the pattern looked like a Bear Flag.   :P 

Even with indicators and charts, it still ain't easy.  ;D  >:D

Quote from: Melf Elf on September 19, 2006, 05:16:08 AM
Was the buy signal given after the chart had formed a nice bullish base, or was the buy signal given when the stock was ready to smack right into resistance? 

Big difference, right?

akclide,

Here's an example of that, using ESLR.

On August 17, MACD had a positive divergence AND it crossed above its signal line, so a "buy signal" was given.  Do we want to take the signal, or not?

What's the chart doing, at that point?

ESLR closed at 9.24, and was up 15.6% off its recent 7.99 low, which would be the "logical stop" on the trade.

Where is resistance?

The blue trendline from broken 10.00 - 10.25 support, which was at 10.34 on August 17, when the MACD "buy signal" was given, or 11.8% higher from the 9.24 close.

The trend is bearish.  The stock hasn't formed any kind of base to attack all of that overhead resistance.  Support is 15.6% below the close; resistance is only 11.8% above the close.

Do we want to take the buy signal?  No, thank you.  ::)

Do we want to short ESLR at 10.42, at trendline resistance, and at the declining 50DMA, or short it at 9.92 on the break of the Bear Flag, when MACD ticked down from just below zero? 

What's the trend?  Bearish...

How is the stock acting?  Bearish...  ;)

Quote from: Melf Elf on September 19, 2006, 05:57:34 AM
What's the trend?  Bearish...

How is the stock acting?  Bearish...  ;)

Topic: The Trend Is Our Friend

We all hear that when we're new to the markets, but we tend to ignore something that simple, and tend to complicate it by trying to do things like guessing tops and bottoms, for example.

Scroll up and look at the Bear Rising Wedge (or Bear Flag, if you will) rally back to resistance in the ESLR daily chart that I posted this morning, then look at this Bear Rising Wedge (or Bear Flag) in the Hourly chart.

Given "the trend is our friend," how would we have expected this pattern to resolve?  Once the pattern broke to the downside, does it seem reasonable to expect it to go lower?

It doesn't ALWAYS.  I can't give a percentage, but more often than not, this is the result when a bearish pattern breaks to the downside in a bearish trend.

Thanks For your help and wisdom.I have always enjoyed reading your posts and have learned from them.Keep them coming may be one day everything will click.

ESLR looks bearish right now but I believe very soon will be a prime entry for long term hold im looking at adding between 6-8. I believe ESLR will be a leader in the solar industry in the upcoming years ahead, their cost effective manafacturing and a primary location in the U.S. will be key to success over the long term. A weakning USD will help boost the demand for industrial manufacturing in the U.S. (making it more economical to produce goods in the U.S. and export domestically and internationally.) Right now ESLR is getting hit hard because of the energy correction... However in the next 5 years its safe to say oil and energy prices will be even higher. Oil doesnt grow off trees ;). In the next 5-15 years its a safe guess there will be a major shift in world energy sources; Solar, bio fuels, and other alternative energy methods will be used on a mass scale at sometime in the future. Anyway I think ESLR has lots of potential.

Melf, thank you again!  You keep me studying!  :)  I have been thinking about your bulls and bears duking it out across a line of resistance/support that you mentioned a few post back.  Your "overhead resistance" as the bag holders sell to get out?  Couldn't this also be looked at as bagholders holding to break even there by supporting the rebound price?  I pose the ? because I am thinking about it... as price is mostly driven by BIG investors not us small retailers  would you say that they are more likely to try to "cut losses" and move on to a stock that is setting new highs?  (did you see SEBFR's post on shorting GLW, it fits this logic...)

You have been waching far longer than I, I do need to abserve the trend more closely.  Yet my observations have noticed that often if RSI hits 80+ or 20- QUICKLY than a bounce in the opposite direction is more probable than not (GNTA this week), if the extreem RSI is met gradually than the trend seems stronger and less likely for a profitable short term trade (FPP) (and VLO somwhere in between)

That is my 2 cents on the RSI indicator.

I am curious to see where HSOA goes, deffinate down trend, and i am holding a bag... I am hoping that this rebound gives me a chance to get out above 6 but the little guy is saying take the money and run NOW!  NVAX is similar but i feel has more upside potential in this market so will hold.

I bought some ISIG on the pull back today, here is an up trend for ya!

Cheers Joe

Quote from: akclide on September 19, 2006, 08:39:34 PM
Thanks For your help and wisdom.I have always enjoyed reading your posts and have learned from them.Keep them coming may be one day everything will click.

You're very welcome, akclide.  Glad if any of it helps you.

Quote from: nullzero on September 20, 2006, 01:52:35 AMIn the next 5-15 years its a safe guess there will be a major shift in world energy sources; Solar, bio fuels, and other alternative energy methods will be used on a mass scale at sometime in the future. Anyway I think ESLR has lots of potential.

nullz,

I'm surprised that it hasn't happened a lot sooner, given the problems that we had in the '70s.

Quote from: joet on September 20, 2006, 03:34:48 AM
Melf, thank you again! You keep me studying! :) I have been thinking about your bulls and bears duking it out across a line of resistance/support that you mentioned a few post back. Your "overhead resistance" as the bag holders sell to get out? Couldn't this also be looked at as bagholders holding to break even there by supporting the rebound price?

joe,

I'm not quite sure what you mean by the last question, but yes, when stocks get back to resistance, bulls and bears "duke it out,' and if there isn't much of a base bulit, the bulls often get handily defeated, like on September 1 in ESLR, when the Bulls got turned back right at resistance (blue trendline and Red #4) on a Bearish Gravestone Doji Star Hangman.

The Bulls weren't able to make any progress whatsoever.  :(

Topic: Managing The Trade

ESLR broke below another bearish pattern, and also made a "lower low," below the 8.75 low of this little Bearish Rising Wedge.

When that occurs, we can lower the stop on a short trade to a penny above the high of the pattern, which in this case would be 9.51, a penny above the 9.50 high.

Quote from: Melf Elf on September 19, 2006, 03:31:46 PM
[more often than not, this is the result when a bearish pattern breaks to the downside in a bearish trend.

Topic: "Don't Step Over Dollars To Pick Up Dimes"

ESLR has played out in textbook fashion.  Bearish patterns.  Failed re-test of broken trendline support.  It's come down this morning toward the August low target of 7.99.  It might not get down there exactly, and we can't expect to get every last dime out of a trade. 

This is close enough to the target to "take profits when targets get MADE."

Topic: Fighting The Trend

After closing back below former "quintuple bottom" support at 1.25 on September 6, GV ran into the 8-day Tenkan-sen (green), and has walked down the under side of it to a new low for move yesterday, at 1.00.

Quote from: Melf Elf on July 20, 2006, 02:42:34 PM
In addition to the stacked resistance beginning at 1.49 that I outlined in my post this morning, near-term resistance, basis the 10-minute chart below, is at 1.44. GV has been trying to get through there for the past few days, and repeatedly has gotten refused.

The high for the move came in two weeks later, on August 2, at 1.49 exactly , which was the low end of stacked resistance. GV is down an addtional 32% from there. 

While it's tempting to try to catch a bottom, or to buy a stock because it looks "cheap," it's also tough, fighting a trend.

UGH.  :P

Topic: W-Bottoms

Alister,

W-Bottoms, generally, look like the letter "W," although sometimes, as in the case of INSM below, the middle of the pattern is a little more complex, with the 1.29 and 1.28 highs.

Generally:

1. The stock comes down and forms a low, for the left leg of the "W" (1.03)

2. It then rallies to a high, to form the middle of the "W," which is the key to the pattern.  In this case, it's 1.29 and 1.28.

3. Then it comes back down to form the Right Leg of the "W" (1.02)

The breakout occurs when the middle (1.29 and 1.28) of the pattern is taken out to the upside.

To measure the target IN PLAY, take the high of the pattern (1.29 and 1.28) minus the low of the pattern (1.03 and 1.02), then add it to the breakout.

Since we have more than one choice of both the high and the low, I always use the more conservative of the two numbers so that I don't over-estimate the target.  So...

1.28 (the lower high) minus 1.03 (the higher low) = 0.25 points

1.28 + 0.25 = 1.53 IN PLAY

This is a good example of using the conservative numbers because the target MADE within one penny, but if I had used the 1.29 high minus the 1.02 low (0.27 points) the target would have been 1.29 + 0.27 = 1.56 IN PLAY, and that would have missed by a few cents.

As you know, though, targets aren't exact anyway, but rather, measures of "what we're aiming for."

Hey Melf,

I was just wondering if you have time, if you would be able to elucidate a little about how you set targets, as your targets are alway very specific, and you  seem to have a very good grasp on exactly how to set targets from different types of patterns.  For example, how exactly do you set the target for a falling wedge breaout - is it the wedge high minus the wedge low from the pattern breakout?

I would be very interested to hear exactly how you set your targets for various pattern breakouts (e.g., wedges, head and shoulders, triangles etc.)  I think it would also be of huge benefit for all of use in setting our own targets on stocks we trade.

Anyway, thanks buddy, hope you have time to get round to this, and as always, god trading ;)

Scotsman

Quote from: ScottishTrader on November 18, 2006, 06:23:38 PM
Hey Melf,

I was just wondering if you have time, if you would be able to elucidate a little about how you set targets, as your targets are alway very specific, and you  seem to have a very good grasp on exactly how to set targets from different types of patterns.  For example, how exactly do you set the target for a falling wedge breaout - is it the wedge high minus the wedge low from the pattern breakout?

I would be very interested to hear exactly how you set your targets for various pattern breakouts (e.g., wedges, head and shoulders, triangles etc.)  I think it would also be of huge benefit for all of use in setting our own targets on stocks we trade.

Anyway, thanks buddy, hope you have time to get round to this, and as always, god trading ;)

Scotsman

I agree with ScottishTrader here, and I have mentioned it to you before that its impressive to me ow often you hit your upside targets so soon, and how often those stocks go down right after reaching the range of your target.  That is why I call you the Stock Surgeon, I also would love to hear some more about how you do it, too!

Scotsman and Tok,

Sure, I'd be glad to explain.  Once in awhile, I do the Math in posts, like in the SIGA folder this morning, so you might want to look it that folder, as well.  My posts already are way-y too long, so I try not to bore everyone to death with so many details.  :P

I think that I explained the Math for this Symmetrical Triangle target in the AAPL folder, but we'll walk through it again here:

70.00 - was the high on August 3
62.58 - was the low on August 11 (Purple #2...I didn't have room to write it)

70.00 - 62.58 = 7.42 Points

Now you need to calculate the slope of the top of the pattern (#1 and #3) to find out the data point for the trendline for each day, so you'll know exactly where the breakout will occur.

That's the primary reason that I won't draw trendlines that go slicing through candlesticks, cutting through tops and bottoms.  You haven't got any way to know where the breakout occurs, nor can you take an accurate measurement, to derive your target IN PLAY.

In this particular case, on September 5, the trendline (#! and #3) was at 68.634, so we add the 7.42 points to that number on a breakout:

68.634 + 7.42 =Target: 76.054 IN PLAY.

Quote
I agree with ScottishTrader here, and I have mentioned it to you before that its impressive to me ow often you hit your upside targets so soon, and how often those stocks go down right after reaching the range of your target. That is why I call you the Stock Surgeon, I also would love to hear some more about how you do it, too!

On September 21, APPL printed a high of 76.06, 0.006 above the target, then it sold off quickly to 72.58 before rallying again, then forming a Bullish Falling Wedge.

I would have to guess, Tok, that the reason stocks sometimes hit targets or trendlines so exactly like that, is that technicians know where those targets are, where the support and resistance is, and they step in and buy, or sell, accordingly.

By the way, Target #1 always is the top of a pattern, to defend against a Double Top in the stock, so in the case of this Symmetrical Triangle, Target #1 would be the 70.00 high.  I always take some profits near there, "just in case."  And, in those cases, don't hang on for 70.00 exactly.  Sometimes, you'll get only 69.96...or, 69.92.  Close enough.  Take some profits.

"Don't step over dollars, to pick up dimes."

I calculate Bullish Wedges the same way Scotsman, like the one on this chart, although I've read that "you can't."  Those might be a little less reliable, as far as the target getting MADE, but it worked out fine here.

As you both know, targets don't always get MADE, especially when it's a target against the trend, coming out of a weak base.  Targets are just "what we're aiming for."  Sometimes, too, they get exceeded by a good bit, too, like this Symmetrical Triangle.

The target just is for that particular pattern.  It can go plenty higher, like AAPL has done.

Let me know if that helps, or if you need more information/examples.

OK so for example, one that I have been looking at just recently is Sony Corp (SNE).  To me it looks like it has spent most of the last year building a falling wedge, and while that wedge has had a couple of spikes below support, it looks pretty valid.  What is clear is descending resistance from the late april high of 52.15.  I put that resistance to come in at about 41.10 right now (unfortunately, I only use stockcharts, which makes it very hard to identify exact trendline gradients like you can in metastock  :-\)  The October low was 37.24.  From this I would calculate that a breakout of this pattern would put a target of (52.15-37.24 = 14.91, + 41.10) $56.01 IN PLAY, approximately a 36% move from these levels.  A secondary target would be the 52.15 high, and the fibonaccie retracement levels also suggest intermediary target levels where the stock may encounter resistance on its way.

Actually, I like the look of the SNE chart right now, and think this could have significant upside potential in the next year (especially if PS3 sales go better than forecast), but I will post my comments about it in another thread.  This was just for illustrative purposes here. ;)

Scotsman,

That's a very nice job on SNE.  Applause.

Your  down trendline TWICE has been validated as resistance.  After we connect the first two data points on the down trendline, the next tag of it, and failure right there, says, "Yes, that's resistance, alright!"  There's your first validation of resistance.

That trendline just got tagged again for a SECOND validation of it as resistance, which says, "YES, I already told you that it's resistance, now LISTEN UP: That's resistance!"

What's nice about getting a validation, and especially more than one validation, is that "usually," a move above it (or below it, if it's support) has some significance.  Yes, you could get a false breakout, but that's why we use stops.

In the short-term, SNE could get "Cramerized" on Monday, as our cumulina puts it so charmingly.  :D

Cramer did an interesting piece on MRVL of Friday night, which likely will pop higher on Monday, as a result.  He began by comparing it to NTAP and RACK, two stocks that had a pretty good selloff this summer, but both guided higher, and both have enjoyed a nice rally as a result.

MRVL just guided higher, so Cramer thinks that it will respond like NTAP and RACK did, and have a nice rally.  He prefers it to SNE, which he feels "has its hand in too many pots" (my words...I forget how he put it).

Cramer gets some right and some wrong, like the rest of us, so he very well could have it wrong about SNE, but as we know, short-term, SNE could get "Cramerized" a bit. 

Your SNE chart puts me in mind of the big six-month Falling Wedge in APPL, prior to its July 28 breakout.  The pullback to the top of the pattern was a PERFECT entry (if there is such a thing as "perfect."). 

I simply didn't see it.  I had it labeled as the H&S Top...then an Inverse H&S...then the big drop into July threw me off...the gap up parabolic rally threw me off...

Curses!  >:(

It all morphed into this BIG Falling Wedge!  The high was 86.40.  Thursday's high was 86.30, so that target MADE within ten cents.  Cramer has a $100 target on it, by Christmas, FWIW.

Funny how these things can look like a "no brainer," in retrospect, isn't it?  ::)

Here's Cramer's comments on MRVL and SNE from Friday night, if you're interested:


"Cramer told viewers "there's nothing more heartbreaking" than missing a 12-point run like people did if they listened to his recommendation to sell Network Appliance (NTAP - news - Cramer's Take - Rating) at its bottom. However, in Rackable Systems' (RACK - news - Cramer's Take - Rating) similar case, Cramer stuck by this stock and told people not to sell even though it was going down. If market players sold Rackable Systems at the bottom, they missed an "awesome 15-point run," he said.

Therefore, Cramer said he's devoting his whole game plan to one stock -- Marvell Technology (MRVL - news - Cramer's Take - Rating), which he owns for his charitable trust, Action Alerts PLUS. "I am not getting this one wrong," he said. "It has been a real stinker like Network Appliance and Rack."    

But on Thursday, the company reported "decent revenue and gave great guidance" like the other two tech companies, Cramer said.

The company is all about product cycles, meaning it should be poised to make a lot of money, he went on to say. Cramer does not believe that Nintendo and Sony (SNE - news - Cramer's Take - Rating) are the console plays people should go with. But he does believe Marvell is in a good spot to see an upswing.

Plus, it is entirely possible that the estimates coming from analysts are "way to low," Cramer said. "When you set the bar low, it becomes easy for the stock to jump."

Listen to Marvell's guidance and buy into its bottom, he advised. It is repeating Network Appliance and Rackable's history."

   

Topic: Leading Indicators: MACD

1. Leading Indicators can be useful in telegraphing in advance, a rally or a pattern breakout in a stock.  Or, a breakdown, if it's bearish.  MACD is an example.

2. Coincident Indicators move right with the stock.  Many ocsillators would fit this bill.

3. Lagging Indicators confirm what we already know, like a Bullish or Bearish Cross of Moving Averages.  Those signals can be issued long after a stock has rallied, or has broken down, and also are known as "Confirming Indicators."  In that example, the "Cross" is confirming what we already know.

The first example that we'll look at, is the Bullish Inverse H&S breakout in the MACD of ISV, a stock that Holygrale currently is playing.

For easier chart viewing, we'll look at the MACD chart first, then the stock chart itself.

1. We can see that the first clue of an impending Inverse H&S breakout in the MACD came when it "banged off the signal line," coming out of the Right Shoulder.

The way that we would use that signal, is to look at the high of the day prior to that "bang off the signal line."  The high was 1.43, so that's our "Buy Pivot," meaning that if the stock trades one penny above that, a "Buy Signal" is issued, so "Buy a print of 1.44."

At Friday's 1.89 close, that's a paper gain of 31.2%.

2. We also can use a breakout above the neckline as our Buy Signal. which occurred on November 17.  The "Buy Pivot" was 1.50, so the "Buy Signal" was a print of 1.51.

3. Finally, we can use MACD crossing above the zero line as the Buy Signal, which is the more traditional use of this indicator, independent of using the Bullish Inverse H&S pattern.  That signal was given at 1.61.

Next, we'll look at the chart, with those three entries marked.

The 3 Signals mentioned in the last post are marked with a green arrow, and a green "M."

Notice that when the first signal was given when the MACD "banged off its signal line" coming out of the Right Shoulder of the Inverse H&S, the 8-day (solid green line) already had made a Bullish Cross above the 22-day (solid red line), and that ISV was finding support there, prior to rallying to 1.65, establishing the neckline of the Inverse H&S pattern in the chart itself.

Notice also that when MACD finally crossed above the zero line, ISV was almost at the 1.67-1.65 neckline, so that traditional use of the MACD lagged a little.

Getting in on the first signal, coming out of the Right Shoulder, or on the second signal, the breakout of the Inverse H&S pattern in the MACD, would have us in the stock at a much lower price, and well ahead of the Inverse H&S pattern breakout above 1.67-1.65, which occurred on December 5.

The Inverse H&S breakout in the MACD was a leading indicator, telegraphing the breakout in the stock.  It lead the breakout by almost 3 weeks.

Next, we'll look at a different "leading indicator" signal from the MACD, using Southern Peru Copper (PCU).

Topic: Leading Indicators: MACD - "The 1-2-3 Go Signal" and "The 1-2-3 Bang, Bounce, and Go Signal"

At green #2, there is a Positive Divergence in the MACD Histogram (vertical black lines).  That sometimes is enough to give a stock a pop to the upside.  Much depends on what the chart itself looks like, and we always want to view indicators in that context: what does the chart look like?

At green #3, MACD crosses the zero line.  That's the "Go" of "The 1-2-3 Go" Signal.  Again, much depends on the quality of the chart itself.  Is there a base?  Is there a pattern that has formed, that is about to break out?

At green #4, MACD has come back to the signal line AT ZERO, and has kicked higher from there .  That's the "bang and bounce" of the "1-2-3 Bang, Bounce and Go" signal and it often is a little stronger signal the "1-2-3 Go" Signal.

I coined that name for lack of coming up with something better.  "Bump And Run" already has been taken, or I would have called it that.  It's a good description of what occurs.

Next, we'll see how those signals played out in the price chart of PCU.

Before we do, though, take a look at the Negative Divergence in the MACD  that occurred in November.  "Sometimes," that's a sell when the MACD goes below its signal line.  Again, much depends on what the price chart itself is doing.

We'll also look at that Negative Divergence in the next post.

We can see from the price chart that taking any one of MACD signals at Green #2, 3 or 4 would have worked out very nicely.  All three of the signals served very well as "Leading Indicators" of the impending Rectangle breakout in PCU.

Quote from: Melf Elf on December 10, 2006, 04:52:53 PM
... look at the Negative Divergence in the MACD  that occurred in November.  "Sometimes," that's a sell when the MACD goes below its signal line.  Again, much depends on what the price chart itself is doing.

We'll also look at that Negative Divergence in the next post.

The actual "Sell Signal" off that Negative Divergence was issued on November 14, when the MACD crossed below its signal line.  PCU closed at 50.91 that day, but the low of the selloff was put in the very next day at 49.64, a successful re-test of the 49.67 high of the Rectangle.

Great example of how we often see or hear, "There's a Negative Divergence in MACD and it crossed below its signal line, so it 'said' SELL."

No, it didn't.

MACD still is above the zero line, and the stock itself hadn't done anything wrong.  In fact, the stock had done "everything right" by finding support at the Rectangle pattern breakout, both on November 15 (low was 49.64) and on November 17 (low as 49.66).

That's bullish.

Shorting the MACD "Sell Signal" at 50.91 would have us in trouble at the moment.  PCU closed Friday at 55.83, so we'd be squeezed for a paper loss of 9.7%.

Topic:  H&S Patterns

Sub-Topic: "Got Game?"

I'd not only like to write a book on Technical Analysis, I'd also like to invent a computer game to go along with it that, hopefully, would be as wildly popular among the stock market crowd as Texas Hold 'Em is among the gambling crowd.

Dream on, Melf Elf!  :D

It would go something like this...

You're presented with this chart, and you decide whether to Buy, Sell (Sell Short), or HOLD.

You see that it's a H&S Top, in fact, it looks like a DOUBLE H&S Top!

We know that those can be terribly bearish, so we refer to the book, "Melf Elf's Guide to Financial Healf and Wealf" to see about it.

At the end of the chapter, there are TIPS, like:

Tip #1: You want confirmation of the breakdown, by the stock closing below the pattern and below the "lowest low" of the formation.

In this chart, the 10.65 low hasn't been taken out yet.

Tip: #2: Observe the high of the Right Shoulder (s).  That "shouldn't" get taken out to the upside.  If it does get taken out to the upisde, it might not be as bearish as it seemed.

In this chart, the highs of the TWO Right Shoulders are circled in blue.

Okay, "Place your bets!"  ;D

Next chart coming up in just a minute. 

By the way, I might get an opportunity next week to play this game in real time, so I'm practicing a bit.

In my fantasy computer game, as each day's candle is presented to you, you must decide what you want to do with your position, just as in the real market.  Buy, Buy To Cover, Sell, Sell Short or Hold.

And, just as in the real market, you can reverse your position. 

At the close in this chart, Mystery Stock has taken out the highs of BOTH Right Shouders.

Remember:

Quote from: Melf Elf on January 28, 2007, 12:00:22 PM
Tip: #2: Observe the high of the Right Shoulder (s).  That "shouldn't" get taken out to the upside.  If it does get taken out to the upisde, it might not be as bearish as it seemed.

In this chart, the highs of the TWO Right Shoulders are circled in blue.

Tip #3: If the Right Shoulder is taken out to upside, you want confirmation of that by the stock CLOSING above the Right Shoulder.

Mystery Stock closed above 12.12, but didn't close above 12.78.

Tip #4: If the Right Shoulder(s) of a H&S Top pattern get taken out to the upside, you then want to see a close above the high of the Head of the pattern.

The high of the Head in Mystery stock is 14.00.

Okay, place your bets!

In the computer game, each day's candle is presented, and play continues.  We fast forward to this candle, in which the high of the Head, has been taken out on a print basis, but NOT on a closing basis.

Remember:

Quote from: Melf Elf on January 28, 2007, 12:15:59 PM
Tip #4: If the Right Shoulder(s) of a H&S Top pattern get taken out to the upside, you then want to see a close above the high of the Head of the pattern.

Tip #5: If there is a CLOSE above the high of a H&S Top, instead of subtracting the distance from the high of the Head to the neckline, and then subtracting that from the neckline on a bearish break of the neckline, you ADD the distance to the top of the Head.

In the case of Mystery Stock, you would ADD about 3.34 points to the 14.00 high of the Head.

Tip #6: If a H&S Top is taken out to the upside, there "could be" some Shock and Awe to the upside, because the expectation of most players is that the pattern is bearish, and will be resolved to the downside.

Tip #7: Unless there is a clear takeout of the high of the Head, be prepared that it "could be" just a Double Top, and that it still is bearish.

Place your bets!

Quote from: Melf Elf on January 28, 2007, 12:46:12 PM
Next post, we'll look at a somewhat similar pattern that currently is playing out.

Before we do that, let's do a little more of the fantasy computer game for practice, so that the pattern

Quote from: Melf Elf on January 28, 2007, 12:00:22 PM
Topic:  H&S Patterns
Tip: #2: Observe the high of the Right Shoulder (s).  That "shouldn't" get taken out to the upside.  If it does get taken out to the upisde, it might not be as bearish as it seemed.

There aren't many things in trading about which I'm unyielding, but that's one of them, as many of you know!

If ever I'm short a H&S Top and The Right Shoulder gets taken out to the UPSIDE, I "Buy To Cover" in a nanosecond, because the market is telling me that I am at risk for a UPSIDE explosion ("Shock And Awe").

In NTRI, we can see that, not only was the high of the Right Shoulder taken out to the upside, NTRI then came back down to it, closed below for one day, but then ripped higher, and CLOSED above the high of the Head.

Uh-oh....Shorts Beware!

We know what's coming, don't we? (We need a "Terrified Face" on the toolbar).

Yep...SHOCK AND AWE.

In addition to the pattern itself being so deadly for the shorts, I would suggest a few other things that also are just as deadly in a stock like NTRI.

NTRI already had rallied probably 1,000% in about a year's time, so we tend to say things like:

1. "That's way-y overextended.  What a great short!"

2. "It's too 'overbought,'" not realizing that the MOST BULLISH thing that a stock can do, is to get overbought, and remain overbought.

3. "It isn't 'worth' this much, based on P/E, etc."

Many other examples could be given, but in all of those three, aren't we imposing our opinions on the market when we step in and unilaterally decide to short something like this?

Yes, of course, we "could be" right when we do it, but when we're getting the kind of BULLISH signals that NTRI was giving ahead of this "shock and awe," we're begging, at least a little, to have our heads handed to us.

We need a "Decapitated Head" on the the toolbar.

Actually, though, they all look decapitated, don't they?  ;D

In the winter of 2006, GIGM appeared to be putting in a DOUBLE H&S Top.

The first day of spring, however, it took out the high of the Right Shoulder (WARNING), and then very quickly took out the 5.63 high of The Head.

Shorts Beware!

GIGM did far more than just the 7.36 target getting MADE.  It went on to a high of 10.78 in the Bearish Rising Wedge, at May earnings, prior to selling off to 6.18, still above the 5.63 high of The Head.

A couple of very good lessons about the takeout of a Right Shoulder, and then the takeout of the HEAD of a H&S Top, from NVEC:

Quote from: Melf Elf on January 28, 2007, 01:13:54 PM
If ever I'm short a H&S Top and The Right Shoulder gets taken out to the UPSIDE, I "Buy To Cover" in a nanosecond, because the market is telling me that I am at risk for a UPSIDE explosion ("Shock And Awe").

1. In NVEC, anyone who didn't respect the upside takeout of the high of the Right Shoulder, at 31.66, got punished fairly swiftly.  NVEC took it out, used the high of the Right Shoulder as support for two days...

.... then ..."shock and awe" to the upside.

2. These patterns are by no means a "piece of cake."  Nothing in the stock market is, as we know.  The target of 52.96 IN PLAY missed getting MADE by a very wide margin. 

The high only was 46.38, but that's still plenty of pain from the the takeout of the Right Shoulder, at 31.66.  That's a gain of  46.5% for The Bulls, and very painful for anyone holding it short beyond the Right Shoulder upside takeout.

The breakdown of the Bear Flag, for anyone long, was a very good clue that the upside target wouldn't get MADE, by the way, and the failed re-test of the breakdown about two weeks later gave a very strong suggestion to give it up, as far as anymore upside for awhile.

Quote from: Melf Elf on January 28, 2007, 12:46:12 PM
Next post, we'll look at a somewhat similar pattern that currently is playing out.

Sorry it took so long to get here.  :D

The pattern that we've examined currently is playing out in HLIT, which will report earnings after the bell on Wednesday, January 31 (always check me on those, but that's what I read awhile back, and I wrote it on the chart).

1. The "Perfect Buy" (if there is such a thing  ;D) was the January 11 gap up opening to 7.52, exactly one penny above the 7.51 high of The Right Shoulder.

WARNING  to The Bears.

Quote from: Melf Elf on January 28, 2007, 12:00:22 PM
Tip #4: If the Right Shoulder(s) of a H&S Top pattern get taken out to the upside, you then want to see a close above the high of the Head of the pattern.

Michael pointed out to us in the HLIT folder on The Previous Picks Board that HLIT was trading at a new high (applauded...those "Heads Ups" can be so helpful).  It had CLOSED at 8.68 on January 23, exactly one penny above the 8.67 high of the Head.

Another WARNING to The Bears.

3. The Bears managed to close it back below the 8.67 high of the pattern on Thursday January 25, putting the target of 10.29 ON HOLD, and also tried to hold it under water on Friday morning, pushing it down to 8.33, but as I mentioned in the HLIT folder on Friday, it looked like The Bears tried to hold a beachball under water...

BOING!

HLIT bounced right back above the PIVOTAL 8.67.

Pivotal because The Bulls control the boards, above 8.67, and 10.29 is IN PLAY; Bears control the boards below 8.67, and the target goes ON HOLD.

My core entry is 8.91, higher than I would like it, so I jockeyed around a bit intraday on Friday, so that my "net" entry now is right at 8.68.

That's immaterial to all of you, of course, but I want to point out that there certainly is risk entering here, ahead of earnings.

If the market doesn't like HLIT's numbers (it doesn't matter what they actually are...it's the response to earnings that matters), HLIT could gap down, below recent support at 8.06.

My stop is 8.05, a penny below that, which I'll sell if that gets printed before earnings, and I also will sell any gap down below that AT THE MARKET, no questions asked.

I'd really like to hold this for the "shock and awe" potential at earnings, but I'm disadvantaged with my entry, which now is reduced to 8.68, so I might sell half, to lay off some the risk.

If I had caught that "perfect entry" of 7.52, on the takeout of the Right Shoulder, I would hold through earnings for sure.  I'd have plenty of cushion (an 18% paper gain, at this point)  to absorb any hit from a gap down opening off earnings.

What I'd like to see this week:

1. Another selloff to 8.67, only this time, for the Bulls to establish that as support, like NVEC used the high of the Right Shoulder as support, prior to "shock and awe."

2. HLIT blow away earnings expectatations to the upside.

3. Or, HLIT simply meet earnings expectations, which "should" bring in buyers who don't like to hold long ahead of earnings, but who like the H&S Top pattern breakout that we've gotten, above 8.67.

There is more risk than usual, buying HLIT at this high level "pivotal juncture," ahead of earnings, so I want to make it clear that the point of this series of posts isn't a recommendation to buy.

Just wanted to point out the pattern, and it's characteristics, mainly so that those of you learning can understand how these things evolve in the market, and watch how it plays out in real time.

Also, to learn things like:

1. Where's a good entry?

2. Where's the stop?

3. What's the anticipated risk?

4. What's the expectation of reward?

Hope that some of this helped to explain those things. 

Topic: It isn't the fundamentals that matter.  It's the market's reaction  to the fundamentals that matters.

Case Study: CRAY

#1: August 11, 2006 - CRAY won a $52 million supercomputer contract.  Good news, right?  What was the reaction to that good news?

CRAY put in a high of 14.12 right there, broke below a Symmetrical Triangle near $12 on September 11, 2006, MADE the 9.01 target IN PLAY, and finally bottomed at 8.36, for a loss of 40% on that "good news."

UGH.  :P

#2: November 21, 2006 - a $250 million agreement with DARPA.  Five times the good news of August 11, 2006 in terms of dollars.  What was the reaction to that good news?

CRAY had a "Gap To Crap" the next day, rallied almost 35% intraday, then plunged, and gave it all back, and a little more, at the 9.75 low in December, 2006.

:P

What a nice buy the gap fill of 9.99 turned out to be though, huh?   ;)

#3 - February 15, 2007 - CRAY reported earnings of a $0.33 profit vs. a loss of $0.42 in the prior year.  Additionally, CRAY won an $85 million British supercomputer contract.  What was the reaction to that good news?

CRAY broke out above a Symmetical Triangle, crossing 13.23, putting 16.94 IN PLAY, took out both highs of the pattern (13.45 and 13.32), and closed near the high of the day.

Big difference between Friday's reaction to good news , and the prior two reactions to good news.

Friday's (February 16) response was a tempered, bullish response (Symmetrical Triangle breakout) that held up into the close.  No huge "Gap To Crap" over-reaction to the good news.

If we were watching CRAY prior to, or on Friday morning (unfortunately, I wasn't), we can structure a nice risk: reward trade:

Breakout at 13.23.  Target IN PLAY is 16.94.  Reward if it gets MADE: 28% gain.

Stop loss: Below the 12.00 low, prior to the breakout (so, 11.99): Risk: 9.4%

Risk: Reward on the trade: 1:3.

Stop loss also could be 12.78, below Friday's 12.79 low.  Risk: only 3.4%.  That would improve the risk: reward to 1:8.

Fundamentally, CRAY is a turnaround story.  This Fiscal Year's estimate is a loss of $0.58.  The prior Fiscal Year was a loss of $2.92.

:P

Next Fiscal Year estimate is a gain of $0.48, so things are on the mend.  :)

Summary comment:

Watch the market's reaction to the fundamentals.  Markets don't always trade in tandem with the fundamentals, be they good or bad, and the chart/technicals can be of great assistance in helping us to determine how a stock is trading, vis a vis the fundamentals.

Do the fundamentals and technicals agree, or disagree?

My opinion is that "When the fundamentals and the technicals disagree, defer to the technicals, or at least give them strong consideration."