So here we are again:  We have a market that is short-term extended with lots of stocks very extended (more on that point in a minute).  And the markets are still close to areas of prior resistance as you can see from this chart of the Dow — in this case the Dow is right at the top of a 7-month downtrending channel with the full stohcastics once again in extreme overbought territory:

So what do we do now?  Well, the chart of the Dow is telling us if we are long to take profits and consider going short.  We also have the Dow Industrials in a 60 minute frequency showing what one could say is a break and backtest of the rising bearish wedge we showed recently.  And that pattern is still in play…

Notice how the news driven, program trading, options expiration led upside spikes since the 1st of the month are getting smaller in size?   Notice how basically this index aside from Friday’s move hasn’t really gone anywhere?  You wouldn’t know that by watching TV (they all say we are going to the moon… which is also by the way exactly what you’d expect to hear AFTER an index has been on a tear).

Now what are stocks that have led this 6-week rally telling us?  Let’s take a look at some of the leaders:

What we see when we look at these stocks are stocks that are very, very extended from any area of meaningful support and are well overbought.  Surely no low risk long side entry points can be had in these names at their current levels. So when you combine this with what the charts of the Dow are telling us, one could conclude that avoiding new buys and going short would be the way to go.

In addition to that take a look at all of these following charts. See any low risk Pullback Off Highs (POH) chart patterns here?

What do all these charts have in common? All have been on a tear. All have that short term POTENTIAL Double Top look to them.

When we look at charts, we are ALWAYS looking for one of three things:

1. On the Longside — A Pullback Off Highs uptrend pattern
2. On the Shortside — A Pullback Off Lows downtrend pattern
3. In a transitioning market — A Change in Trend pattern (up or down or down to up)

We are seeing longside and shortside patterns form in some of the leading stocks.  Just remember “Bigger Is Better”.  The bigger the base, the bigger the break.  And the bigger the pattern, the bigger the break– long or short.

So here’s where we stand.  Should a pullback in the markets be the pause that refreshes as — after all we’ve never really pulled back for more than a day or two as of yet — we will be ready to take advantage of that opportunity.  If the market continues its rally, we already have five nice long side set-ups on our watch list with more developing that we can take advantage should they trigger.  This is what we mean when we say you have to trade what you see…

Sincerely,
David Grandey
All About Trends

April 20, 2009

The Bigger the Pattern, the Bigger the Break was originally featured in the Penny Sleuth.

Well, we’re still waiting.

Sure, we pulled back on Monday — but not enough to relieve an overbought condition. Don’t get us wrong, we’d love to be buyers on the long side. However, we are NOT going to chase stocks.

We need to see patterns that we can actually work off, versus highly emotional money chasing things. That’s not what we do and that’s not how we’ve earned over $34,000 in 8 months.

Now that we’ve had a strong rally, the most important pattern that we want to key in on from here is the Pullbacks Off Highs (POH) longside entry pattern.

We also said: Don’t Rule out a retest of the highs in the short term either though as the market’s new short-term resistance may yet need to be tested one more time if we are going to work lower in the short-term. In so doing it would create a Double Top (the early warning sign that a change in trend from up to down is near) assuming it sticks and rolls back over from there.

Thursday we got the retest in the form of the “Mark To Market” news. Then on Friday we got the employment numbers.

As of this moment, this is what we are seeing. We hate to sound like a broken record, but it is what it is…

What’s so special about Thursday’s highs?

The Dow bumped its head on the 61.8% Fibonacci level which as far as retracement levels go this is a pretty standard level where one can expect a pullback. Other levels are shown as well at the 38.2% and 50% retacements. This is another way the market talks to us.

How to Trade Pullback Off High Patterns

Now that the market has rallied impressively, normal, positive action would be for it to pullback to consolidate its gains before resuming a new move higher. The same is true for individual stocks.

These pullbacks, or mini-downtrends, are our opportunities to get positioned to benefit from a stock’s next leg up. Let’s take a look at a classic example:

Each pink line represents a pullback off highs pattern. Notice how each pullback is usually a normal pullback to an area of strong support such as an upward trendline or the 50-day moving average? And the pullback resets the full stohcastics to oversold territory. This combination is very healthy action and it is what we are seeing in some stocks that just might be the leaders of the new rally.

In fact, we have three stocks on our current watch list that are in a new uptrend and are currently forming their second pullback off highs pattern (second pink line) after making strong gains when they emerged from their first pattern.

So what do we do with these patterns? It’s really simple, a break above the pink line triggers a trade on the long side.

Sincerely,
David Grandey
All About Trends

April 6, 2009

How to Trade Pullback Patterns was originally featured in the Penny Sleuth.

All uptrends break to the downside and all downtrends eventually break to the upside. They are Change In Trend patterns that you really need to be on the lookout for. After all, if you are long, a trendline break to the downside is your cue to get out of dodge. Conversely, if you are short and an issue breaks its downtrend to the upside, it’s time to run for cover and lock in your gains.

Today we’ll be talking about trendline breaks to the downside. They say a picture is worth a thousand words… so rather than explain it away, just take a look at the charts below. They are great examples of what we are talking about…

So what happens after they break the uptrend to the downside? We call that a1st Thrust. That first thrust is an excellent trading opportunity — it’s often one of the most explosive moves a stock will make. Think about it. If a stock has been going up for a long time, it’s going to fall hard and fast when institutions decide they want out. The same goes after a stock’s been falling for some time. We’ve seen stocks absolutely go into orbit as investors pile on to get in at bargain prices.

After a 1st thrust down, we want to watch for a snapback rally as shown.

The battle cry with these patterns are : 1ST THRUST DOWN (blue box on all), SNAP BACK RALLY (Pink Lines) , BOMBS AWAY.

Now it’s your turn, look at the issue below.  What do you see?

Sincerely,
David Grandey
All About Trends

March 2, 2009

How to Trade Trendline Breaks was originally featured in the Penny Sleuth.