June 07, 2007 at 11:08 pm | | Comments 0

When Patterns Fail

Things turned ugly this week for the first time in a while, and a lot of charts actually needed this shakeup. The CNBC headlines and dreary comments of “the worst week since March” don’t actually say much, especially since all we’ve done pretty much since then is climb higher each week. But it’s been a pretty quick correction so I can agree to that.

It’s too late to short sell on this move and a very high-risk spot to buy, so it’s the ideal time to clean out the watch lists and remove the stocks that all of a sudden are simply clutter. Lots of stocks were setting up bullish chart patterns just a few days ago, but in the last couple of sessions they’ve pulled back sharply and negated their patterns. In my book, that’s grounds for dismissal from the watch list!

One example is JRCC, which I highlighted earlier this week in my stock newsletter for members at The stock had been trending higher and had built a bull pennant pattern, implying more upside could come if a breakout could be produced. Instead of breaking out and triggering a buy for us, it simply sat on the watch list until today when it folded up like a cheap tent, making the pennant pattern obsolete. I’m anything but a camper, so I’ve removed this one from my watch list. Here’s a look at the failed pattern:

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

The good news is that we never bought this stock because it never broke out. That’s the beauty of trading from the charts. If the expected move never comes or the stock reverses entirely, it doesn’t even matter. And that’s a far cry from trying to be overly anticipatory and buying before the chart says it’s time to.

This volatility in the market is going to keep the trading environment good for a while, and the pullback will help to produce lots of new setups for trading in the coming weeks. In the meantime, keep those watch lists streamlined with stocks that look ready to move, and get rid of everything else. It’ll help you move faster once it’s again time to buy. But not yet.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service

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

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