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Strategies & Market Trends : Strictly Buy and Sell Set Ups -- Ignore unavailable to you. Want to Upgrade?

To: XiaoYao who wrote (4974)	7/29/2005 2:43:46 PM
From: chowder	Respond to of 13449

Great question! I don't have time to respond now. I will cover this over the weekend as this is a critical scenario that is worth commenting on! You have asked me to comment on something that is vital to understand when using technical analysis. Did I say it was a great question? It was. Yes indeed. dabum

To: XiaoYao who wrote (4974)	7/30/2005 11:01:14 AM
From: chowder	Respond to of 13449

Yes, AVL did have the typical 3 bar drop two days ago. Let me break down the chart for you. On 7/22, AVL gapped up at the open and formed a high volume, wide range bar as price broke out to a recent high. Normally you will see profit taking off of set ups like this and we will look for our 3-5 bar drop pattern and see if a buy set up appears. stockcharts.com[h,a]daclyiay[d20050430,20050722][pb50!b20!f][vc60][iut!Lah12,26,9!Lc20]&pref=G Three trading sessions later, we have our 3 bar drop into a minor price support level. This is where we look for a reversal. In looking for a reversal, I look to the MACD indicator to judge the underlying stength of the price movement. Since MACD is weakening, I will look for a reversal to capture most of the recent correction but, not look for price to break out to new highs. stockcharts.com[h,a]daclyiay[d20050430,20050727][pb50!b20!f][vc60][iut!Lah12,26,9!Lc20]&pref=G The next day saw the reversal. The pattern worked as anticipated. Price opened at $33.01 and never gave an inch to the downside. That was the low of the day, as price made a nice move that day, providing a gain of 3.6%. This is the type of move we look for off the 3 bar reversal pattern. stockcharts.com[h,a]daclyiay[d20050430,20050728][pb50!b20!f][vc60][iut!Lah12,26,9!Lc20]&pref=G Now keep in mind, technical analysis, as I use it, isn't to predict future price movement. I use it to help identify low risk, high probability buy and sell set ups. Just because a set up appears, it doesn't mean it will always succeed. That's why money management is a vital part of any successful trading plan. If you have a text book set up and the pattern fails, you know to cut your losses and move on. Although AVL was down yesterday, you would still be in the trade if you set up a proper stop loss target. Your stop would have been about 6 cents below the low of the third red candle. Your stop would be set at $32.79. The stop would not have triggered on Friday, even though the stock was down on the day. However, if the stop does trigger on Monday, it doesn't mean the chart pattern is ineffective. The pattern is still effective because it shows you in advance, where to get in and out. You know ahead of time what your actions are once the buy or sell set up appears. This is the value in technical analysis. dabum