Historical studies have shown that chart patterns are consistently repeated over time. Technical analysis is the art of recognizing specific patterns that are key to growth investing.
I want to share with you a swing trade setup that I think you’ll find interesting. Actually, the setup itself is nothing out of the ordinary as far as a swing trade goes, it’s where the setup occurs that makes for something intriguing. Let me explain…
A common swing trade setup is to buy on an upside reversal, often after a stock has pulled back to a moving average or another point of support. What I’d like to point out is if you see an upside reversal in the handle of a cup with handle pattern, you may have an opportunity to ride the stock higher with any momentum generated by a move through the pivot.
In his book How to Trade in Stocks (1940), Jesse Livermore describes a concept that eventually became known as a shakeout + 3 when described by William O’Neil in his book How to Make Money in Stocks.
Jesse’s idea was simple, after a shakeout to a low, if there is another shakeout that undercuts the previous low, the buy price becomes the previous low price plus 10% of that low. Jesse referred to this as a pivotal point.
The “+ 3” aspect came about as O’Neil’s example was based on a stock that was $30/share, hence, 10% of $30 is $3, so it was known as a shakeout + $3.
Calculating Shakeout + 3 Early Entry
On November 3rd, 2020 AMD setup a potential shakeout + 3 early entry. It starts with a recent low undercutting a previous low:
Using the two lows shown above, here are the steps to calculate a shakeout + 3 entry point:
Step #1 - Get two recent low values:
Original low: $73.85 Undercut low: 73.76
Step #2: Calculate prices at 5% and 10% of original low:
5% of $73.85 = $3.70 10% of $73.85 = $7.40
Step #3 - Calculate early entry range:
The range is the original low plus the 5% and 10% values from above: Range = $77.55 ($73.85 + $3.70) to $81.25 ($73.85 + $7.40)
Step #4 - Look for an area of resistance:
As with the range, an area of resistance was not part of the original concept described by Livermore or O’Neil. Using prior resistance you can find a more logical area to enter a trade.
In the figure below I’ve highlighted the early entry range ($77.55 to $81.25). The orange line is an area of resistance, notice several times in the past the price action didn’t move beyond that level.
Shakeout + 3 Example
Here’s a cheatsheet of the shakeout + 3 pattern and how to calculate the entry price.
The orange indicator in the charts that follow, highlights where the power trend is on. The Nasdaq chart goes back to 1984 and the S&P 500 back to 1962. Richard Moglen helped Ajay with data acquisition.
I recently used a pullback followed by an upside reversal to buy shares in two stocks. One of the buys was within a base, which I used as an early entry. The second was a buy to add to an existing position.
It’s worth noting, I am not recommending either stock. My intention is to show how I used a pullback and reversal for two past trades.
Ajay Janimentioned on Twitter it may be worthwhile to revisit Facebook’s move back in 2013 and compare with stocks over the past couple of weeks that have had similar gains in price and volume. The goal is to gain insight into how Facebook progressed after its big move up. Maybe this will foretell how stocks with similar price and volume signatures may play out in the coming weeks.
To begin, we’ll look at two charts of Facebook, paying attention to the price, volume and its upward trend. We’ll follow this with a look at three stocks, AAXN, CHGG and TWLO.
In this week’s Stock Market Update, Mike Webster pointed out that the Nasdaq is now in a Power Trend. In this post we’ll look at what characteristics make up a Power Trend and we’ll also dive into three examples, two from dates in the past as well as the specifics of the current Power Trend.
Here are the primary considerations for a market to be considered in a Power Trend.
Low above the 21-day for 10 consecutive days.
21-day above the 50-day for five days, without a break below the 50-day.
50-day in an uptrend.
If the criteria above are met, for a power trend to begin, it must be an up day.
Once the 21-day crosses below the 50-day that is a sign the trend may be coming to an end. Mike also mentioned there are “circuit-breaker rules” that can end a PT before the 21-day to 50-day crossover.
It should be noted, I am using the Nasdaq for all the charts that follow.
Following is a visual summary I created based on Mike Webster’s discussion on Investors.com IBDLive, highlighting the similarities of the 1998 Nasdaq market correction and today’s market.
Overhead supply refers to buyers who entered a trade near a high and are now waiting to sell as the stock has had a significant drop in price. These buyers are waiting for the price to rise close to the price they paid so they can get out of the trade with a minimal loss.
The challenge with overhead supply is that these buyers can create resistance to upward price movement.
