6 Chart Lessons

In this stock trading walkthrough, I am going to cover a few recent setups and trades that build on some of the recent posts around chart patterns.  I will also add a couple of the names on my own watchlist that I am looking for a position in.

You may see something different on these charts and that is what makes trading available to everyone who puts the work in.  There is not just one conclusion we will all make from a chart.  You just need to become an expert in your own approach.

At the end, I will cover some common questions that may arise.

DMTK

This is a small cap stock that was in a sideways consolidation for about four weeks. After putting in a double bottom, price ran 30% to the upside and began to flag at highs (1) and below resistance.  This is statistically bullish.

On the day of the arrow, price broke the upper trend line of the flag sending an alert that was set.  The inset box shows the first 30 minute bar after the open that closes just off the highs.  Position is entered and the low of the day is the stop loss location.  The day closes on it’s high and above resistance making it a trade to hold.  Price held resistance and and the trade was closed selling into strength on April 1 (second last candle on the chart).

In the article about chart patterns, I had mentioned that if you can get positioned before a potential breakout, you have a greater chance of quick profits.  You need a setup to do so and the flag formation just under resistance in this case, is a viable pre-breakout setup.

ACET

This setup is not my finest moment and came a day after the earnings release for the company. Price, from a structure standpoint, had a triple bottom and a thrust on the day after earnings.  The next day price confirmed a breakout.

The 30 minute inset box shows the entry candle that coincides with the arrow on the larger chart.  The protective stop was placed under the low, but the bar did not have a strong close until the next 30 minute bar.

Going into the close, the stock wasn’t too bad, was closing near the highs, so the position held.  The next day saw an inside bar plot and the stop was left at the low of the previous day.  The third day the traded ended for a loss as price pushed back inside the previous range.

I have written in the past that if price rockets from the bottom of a range and breaks highs, these breaks don’t usually continue the following day. Most often, you will see a consolidation before price continues.

In this case, before the lows at 1, there were shorts in the market that were taken out on the thrust up.  Even with those stop outs, this stock took 8 days to get going.

Besides the thrust up from the base, there also was not a true setup on this chart.  This, from a technical standpoint, was not a trade I should have been in.  Even if it had worked out, it would have been on a bad setup and would still make it a bad trade even if profitable.

GH

This is a mid-cap stock and has a good average daily range over 5% which makes for some good moves in a shorter amount of time.

Price had put in a down sloping channel with a 30% + push off the lows with a break of the upper channel.  As mentioned earlier, you would generally expect some type of consolidation and that is what happens (1).  The breakout from this pattern was the trend line while more conservative traders would look for the high that begins the pattern, to be taken out.

There is no inset box needed for this trade.

The 30 minute opening range breakout did not occur as price did not break the high.  Also, the 30 minute bar closed weak.

As the day progressed, price rallied back up from the retrace that occurred early in the day.  Anticipating a good close, the trade was entered just before close of the session.  The highlighted bar is the next day and is the type of bar you want to see to confirm a change in the state of the market.

Trade was exited on April 1 as that day was running up over 5% and an overall run up about 20% from the break of the pattern.  Selling into strength helps prevent slippage when exiting when the price is moving against you.

NFE

This stock stood out after a 70% run up in price after a breakout which I was not a part of.  I had written in a previous blog post that the first large move in price, I am not responsible for.  The large moves in price can often come out of nowhere but once you know about them, getting the second part is just as satisfying.

After the run up, price puts in a bull flag with limited momentum to the downside.  Price bounced from the previous resistance zone that is now acting as support.  If the bar off the low of the channel was more of a reversal bar like a failure test, that would have been the entry.

Price breaks the top channel line and the inside box shows that 30 minute candle.  Break above the opening range is the entry and stop around the lows of the day.  Price ran over 30% and trade exited at the green line selling into strength.  Price did continue another 20% at the time of this article.

On Watch

One name currently on the watchlist is Peabody Energy – BTU. 

With a 90% run up in price and an ascending triangle in place, I am looking long.  In a perfect world, I would like to see a bit tighter price action but this stock, for me, is looking like a good setup.

TASK – TaskUs

Price travelled 37% from the low before the breakout from this ascending triangle.

Price is consolidating at the highs of that thrust up and I am looking for an entry to get long for another leg.  There is no trade without a setup and and entry trigger.

Finding These Trading Setups – Scans

A simple scan can be used that locates the largest % change over a period of time.  From that list, you want to see an instrument that has a decent daily range.  Anything over 4% is a good starting point.  Some traders may not like the volatility that can show up with with big moving stocks.  In that case, find a smaller average daily range.

You can use large daily changes, weekly, monthly, quarterly.  In fact, new traders may want to use all of those periods to get the practice of looking at as many charts as possible.

Looking for a big move and then a consolidation that suits your eye, is the next step.  I have talked about that in many posts over the years and mainly applied it to bull flags, bear flags, and triangles.

Using Volume

I don’t use volume to confirm a breakout.  Often times, volume comes in the next day.  I do look for a price move that is “different” from the recent past during the breakout.  This is done through calculating a periods return as a multiple of a 20 period standard deviation.  It shows an increase/decrease in volatility and I want to see an increase that is larger than the last 20 periods.

How To Enter

This depends on how much time you have to look at charts.  You can come in near the close of the session and decide if the breakout bar is going to have a strong close.  If so, you can enter prior to the session closing.

Using the opening range breakout is great for traders who can be around for alerts in the first 30 minutes of the trading session.

There are certain bar patterns called failure tests that will test low (or highs) and reject quite noticeably.  Those are good when price reclaims the area it broke from.

Stop Loss Location

I have developed as a trader over the years and have started using low of the days as the initial stop plus a small buffer for longs.  There is some deviation to that depending on price action and there will be times the stop is further to account for an increase in volatility.  It’s a case by case basis.  Although it is possible to be stopped out quickly with a close stop location, the “trick” is to find those instruments showing characteristics of, at least, some short term push in your direction.

Wrap Up

These patterns are identifiable chart patterns that show an underlying imbalance in the instrument.  I look for them only after a large run up in price that hasn’t had a longer term consolidation.  The play is looking for the other leg in the same direction.

You may find the daily charts get a little noisy during consolidation periods.  There is nothing wrong with using the weekly chart to get a better view of price action.

The elevator speech for this type of trading is simple:

Look for a big move in price.  Look for a consolidation.  Look for the break of support/resistance with price action that is unlike the recent past.

You can add in the details.