May 24, 2007 at 7:51 pm | | Comments 4

Gauging Urgency in Chart Patterns

As a chart pattern trader, it’s all about the price action for me. My research isn’t based on company fundamentals or what some analyst is predicting for the next year – it’s based solely on supply and demand as reflected in the chart.

I trade common patterns like flags, pennants and triangles, all of which provide continuation plays within uptrends like we’re seeing right now. The patterns themselves present clear-cut entry and exit levels for my trades, so identifying them is certainly a key part of my method.

However, once I’ve identified a technical setup that I like, my focus then turns to the price action within the pattern. Doing this gives me a much better indication of just how antsy the stock is getting. Watching support and resistance levels within the pattern gives me these clues. A stock which is itching to break out is going to be perking up to test resistance, while one which is acting sluggish will generally be hovering at support.

An example of this can be seen in AMZN, a stock we just closed out Wednesday at We caught 5% at the first target on the first day, and 11% at the final target on the 3rd day. It was a great pop, but let’s look at how the setup developed.

I first listed AMZN in the Bandit Broadcast stock newsletter on May 3rd as it started to create a nice base following the run it made on the earnings announcement. This implied another wave of buying, so I set it up as a swing trading candidate for members. Here’s the chart I showed that night:

(Click for full-size image, courtesy of TeleChart)

The stock didn’t break out for a few days so I highlighted it again to provide an update on how it was progressing. Again I stressed waiting for the buy point before entering, which serves as our confirmation that the stock is headed in the anticipated direction. Here’s the chart I showed May 7th:

(Click for full-size image, courtesy of TeleChart)

A week later, AMZN was trading in a channel pattern, which would ultimately serve as a nice launching pad for another upside move if resistance could be cleared. Here’s the chart from May 14th:

(Click for full-size image, courtesy of TeleChart)

The final indication came when AMZN started to turn up late last week, and you’ll see in the chart below how it moved to the top end of the channel before finally breaking out on Monday when we got our buy signal as AMZN finally hit our trigger price at $63.85. We took partial profits on Monday into the initial move, held it 2 nights and took the rest Wednesday at $71.00 (11%). Pretty nice for a 3-day trade. Here’s the chart at the time of our exit, looking a bit short-term extended and due for a rest:

(Click for full-size image, courtesy of TeleChart)

So the next time you spot a nice chart pattern, remember to measure how well the stock is acting within the pattern. It might indicate that more patience is required before your buy signal is triggered, but once it perks up you’ll know the time is getting close.

And patience pays!

Jeff White
President, The Stock Bandit, Inc.
Take the Money and Run!

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]