Some more on Trendlines
To continue the previous post, if we decide that a stock like ELNK is one that could be profitable trading, but missed the run up in June (see the daily chart again) we need to determine a plausible entry.
As it tanks at the end of the first week in July and starts to recover, we connect a trendline from the low of around 23 in late May to that low of about 30.5 and buy into the stock. Note that the opening prices for ELNK for the first few days after its recovery are the lows for each day. We exit when it starts to horizontally correct (not making either new highs or local lows) mid month.
Assuming we aren't shorting (although there is no reason one couldn't, but this is a rudimentary example), we extend the trendline from above for the major lows and find that it should bottom out again about 32 - which it does, thereby signalling reentry. Again it peaks and horizontally corrects near the end of August.
This chart is a good example why I don't like to hold during horizontal corrections - why bother? If it starts moving up you can always buy in again, and if it tanks fast (like it did) you would lose all profit and maybe some principle befoe getting out.
At this point, the September 2nd low is a new low and the best thing to do is enter very soon. One thing important to note about a stock is wheter its opens are generally the low, or at least in the lower third on an upswing. If it is, then enter at open. If it isn't, then you need to set limit entries based on the new local trendlines. Assuming you get in somewhere around 32 in the next week, you just continue to extend the trendline up until it starts moving horizontally or reverses.
Eventually the volatility will die out, but thiks stock gave two good swings worth analyzing for entry and exit potential. Although it never broke the 47 upper resistance, the chart told you to buy at or below the lower quartile of the major swing (between 24 and 46, the entry ceiling would be 1/4 that, or ~8 points above 24 = $32).
So the question to ask when you look at a stock, is if it is in that lower quartile and having some sector or specific volatility. If its in the upper quartile, forget it and wait for it to retrench. When its going down is actually the best time to start figuring out an entry point.
Now you can also apply this to the other sector stocks to fid out what is the best to enter if they move in a similar pattern. This is actually what the neural net does - its a pattern determination and matching tool.
One last thought about chart formations like head and shoulders and etc. I consider myself a chartist, and I know all of those shapes, but in reality, its only really a particular formation after the fact.
lastshadow |
