I was looking
through my stocks today for a double bottom today, but found instead another
rising pattern.
I have drawn a W-like pattern in this chart, but the “W” looks much like my
scrawl in real life: barely legible. Traditionally, the two bottoms in a W
formation reach the same level, which indicates support. (And ideally, the
lines in this formation should be clean – they should not go through
candlesticks to create the pattern. When they occur, however, W patterns are
a strong sign of good news ahead.
So this is not a buy signal in the classic sense of the word. However, two
other features make this chart interesting. One is the selling climax in
March: The stock gapped down to hit rock bottom on extremely high volume. It
struggled for a while to recover, but at the end of June did so – again, on
high volume. Selling climaxes are the result of pessimistic investors dumping
their shares over despair about a company’s prospects.
Another indicator that gives this chart some charm you can find in the 50-
and 200-day moving averages. In an earlier post I described the “death
cross,” in which the 50-day MA slices down through the 200-day MA. As you can
see, that happened in mid-February, just before the selling climax. If you
now look at how close the 50-day MA (which responds rapidly to price
movements) is to the 200-day MA, there can be no doubt that we will soon see
a “golden cross,” which will confirm what appears to be a breakout in current
price action.
Parabolic SAR
For
this chart, I have suppressed a number of the indicators I use so you can get
a look at an indicator known as “parabolic stop and reverse.” You will
identify it on the chart as lines of grey dots, which cleverly indicate
short-term movements in the market. This indicator is mostly for short-term
traders. For longer-term traders like myself, it’s primarily a helpful
decision-making tool when I’m a bit unclear about whether and when to buy or
sell.
The famous technician Welles Wilder created parabolic SAR – also known as the
“stop and reversal system." It takes the form of a series of dots placed
either above or below an asset’s price on the chart. Wilder also created the
relative strength index (RSI), which you will see at the top of the chart.
That indicator shows the stock to be slightly overbought, suggesting
short-term caution.
As usual, you mustn’t construe anything in this chart as a buy-or-sell
recommendation.
