November 15, 2011 at 12:06 pm | | Comments 2

Detecting Subtle Changes of Character

As traders, it’s imperative that we take note of any nuance or variation from character when reviewing charts.  Doing so can give us occasional false or contradicting signals, but it can also alert us to imminent moves or potential pattern failures.

Take for example those imminent move alerts.  A sudden perk in volume as a stock turns to challenge a key level can sometimes be an indication that a breach of that zone is about to take place.  Someone’s accumulating shares ahead of the break, and technical traders will take note of the volume expansion ahead of a possible break, placing that stock on the radar of many.

Deteriorating Demeanor

Potential pattern failures can also come to light sooner by taking note of variations in how the stock is moving.  With that in mind, let’s examine a stock which may be giving off some of these subtle suggestions like I’ve been discussing.

ARUN has a multi-month uptrend line (higher lows) which has provided support on numerous occasions, letting dip-buyers use it as support to play short-term bounces.  It’s still intact, but something else is of concern.

Specifically, the stock had been establishing higher highs along the way up, with each bounce attaining new recovery highs – until recently.  Over the past couple of weeks, we’ve seen bounces carry to lower levels, and one could even consider drawing a rounded top around the peaks of the past month.  This suggests waning strength in the stock, so I’d avoid a support-based buy at this point.  ARUN may rally again from this area, but I’m not betting on it.

A New Plan

My inclination would be to give this one a bit more time and see if another descending trend line can be drawn at some point from the 10/27 peak along the recent highs and wait for an upside break.  This stock has a history of clearing such trend lines (including the 3 drawn below), so that’s likely a better approach for getting long than a support buy after the establishment of lower highs.

Here’s a closer look at the chart:

Chart courtesy of TeleChart

Again, detecting these subtle variations in the price action is not a guarantee for better entries and exits.  What it does is alert us to potential changes of character so we can make better decisions based on probabilities – and trading is all about probabilities.

Trade Like a Bandit!

Jeff White
Producer of The Bandit Broadcast

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  1. Jeff,
    Thanks for the mini-lessons.I don’t send comments back to you often,but I look forward to your e-mails.I have had one system taught to me and it mainly was position trades in a bull market.It also taught how to short in a bear market.When I received “4 traits of the perfect trader”,[Nov.3],the “just go with it”,really slapped me.It embarrassed me,then I realized what you was saying.It was like in the movie “Moonstruck”,when Cher,slaps N.Cage and says,”Get over it”.All this time I have position trade ,bull market, dominate my thinking.Now,I see things a lot differently.

  2. Hi Tommy,

    It’s sure nice to receive comments like this, I appreciate you sending it my way. I’m glad to have helped provide you with a different perspective, and believe that will serve you quite well. Have the courses at played a role as well?

    Hit me anytime I can help out, you know as a student of the courses I’m happy to assist!


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