While the indexes chewed around Tuesday, the real action was is in the Chinese stocks. And traders who noticed the patterns had the chance to make serious gains… So did you, if you knew where to look. With the first trading week of 2010 halfway over, I’m going to show you what to look for technically to profit during the rest of the year.

What does each of today’s stocks have in common? They are both in confirmed uptrends and they both trade off of trendlines.

Most importantly, each of the following emerged from a common pattern — Pullback Off Highs (POH). I’ve said it before, in uptrending markets, the Pullback Off Highs pattern is the only pattern that you need to know.

The Pullback Off Highs pattern is one of the most bullish and constructive long-side set-ups out there. That’s because rather than go straight up, stocks usually make a move higher, then spend some time consolidating those gains often down to an area of chart support (such as its 50-day moving average), before making another move into new high ground.

When a stock clears these consolidation periods, it’s your opportunity to buy shares and take advantage of the next run — the bonus part is when you catch a stock at the beginning of a new uptrend, you’ll often get to trade the stock and lock in profits over and over again. Buying shares at the point where they’ve just started a new move and are near support minimizes your risk.

Let’s look at some examples:

In the chart above, shares of Linhua International (NASDAQ: LIWA) hit a high around $12.50 and pulled back all the way to $9.00 per share… That, of course, follows another Pullback Off Highs pattern that executed back in early October. When Linhua’s shares broke the pink downtrend line, the signal was sent to traders that it was time to go long once again…

Unlike Linhua, RINO International (NASDAQ: RINO) hit highs above $34, and then pulled back to horizontal consolidation right at the 50-day moving average.  The breaking of the pink downtrend line marked the beginning of that consolidation period – and the time to buy, with shares right at support. This issue is just starting to take off now…

China Green Agriculture’s (NYSE: CGA) chart above shows the same POH pattern as the ones above it… shares broke out to highs around $18.70, then pulled back to the 50-day moving average, where they found support. Just two trading sessions ago, the pink downtrend line was breached, sending me the signal that it was time to go long on this small-cap agriculture play.

In the charts above are three things you always want to be on the lookout for:

1. The stocks are in a clearly defined uptrend and above the 50-day moving average (the thin blue line in all three charts).
2. The stocks pulled back to trendline support, which in each case happened to coincide with the 50 day average.
3. Full stochastics (the ebbing and flowing pair of black and red lines below each chart) were in the oversold position – right around 20 – right when the stock broke above the pink downtrend line.

There’s no question that technical analysis is tricky – mastering trading takes education, practice, and more than a little luck. But going beyond textbook examples, and looking at profitable patterns in real stocks as they trade is the key to taking your trading beyond academics. Here’s to more profitable trades in 2010…

Sincerely,
David Grandey
AllAboutTrends.net

January 6, 2010

David Grandey

David Grandey is the founder of All About Trends, an email newsletter service revealing stocks in ideal set-ups offering potential significant short-term gains.  A successful canslim-based stock market investor for the past 10 years, he has worked for Meriwest Credit Union Silicon Valley Bank, helping to establish brand awareness and credibility through feature editorial coverage in leading national and local news media.

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