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Stock Chart Patterns Every Trader Should Know

  • Posted: 14/ 14/ 2013 at 2:04 AM
  • Updated: 15/ 15/ 2013 at 2:04 AM

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Foreword 

PennyNetwork teaches on a wide array of subjects within trading. Moreover, we aim to teach solid Technical Analysis as it has proven to be the best way to trade. This article, among many of our other articles, is for our target audience of penny stock traders. However, we decided to write this specific article in a manor that all traders will benefit from.  

Technical Analysis:  Just a Bunch of Squiggly Lines on a Chart?

There are many hard-core fundamentalists who believe Technical Analysis (TA) is nothing but Voodoo Research that it doesn’t work at all.  What’s their most common justification for their opinions?  Charts only tell you where stock prices have been, not where they’re heading.  But, isn’t that true of Fundamentals, too?  A company can have the strongest balance sheet, the best products, and the most brilliant management in the world; however, look what happened to Merrill Lynch in 2008, IBM in the eighties and Eastman Kodak.

There are pros and cons on both sides of the aisle and it’s similar to the different viewpoints on abortion, Muslims versus Jews and Christians.  You will never have total agreement on certain controversial issues and your stock picking and market timing methodologies are just such issues.  Of course, there is merit to each philosophy.  If you’re a Technician, you’re a fool to ignore fundamentally bad news about a company; say the Attorney General indicts the CFO  for embezzlement or they announce a restatement of their latest financial report.  Accordingly, a Fundamentalist is foolish to slough off a huge increase in volume and volatility while the price is plummeting.

You Know TA Works but You Need the Right Tools

Out of virtually unlimited trading strategies, buying and selling Breakouts is one of the most consistently profitable.  The key, of course, is to find a chart pattern that indicates a potential upside or downside breakout. Here at PennyNetwork, we use E*Trade’s Pro platform to chart and find stocks via a scanner. You’re stock broker should offer you some sort of platform to do all of this; check out our list of the best stock brokers out right now, maybe it’s time for a change. Alternatively,  you can find a plethora of finance sites that offer charting and screeners to identify patterns.  You could visit StockCharts. com , Marketsmith.com and Chartpatterns.com to start.

Chart #1:  Inverted Head and Shoulders-Bullish

1This is one of the most popular chart patterns for spotting potential breakouts. It is the opposite of the Head & Shoulders, which is Bearish. Technicians concur that when the price rises above the Inverted Head & Shoulders Neck line, particularly when volume is above average, the price is reversing to the upside, sometimes significantly. Another important clue is when volume falls off as the IH&S forms, then jumps when the price approaches the right side neckline. You can reasonably set a price target the distance between the bottom of the head to where the price crossed above the neckline. On this chart for SID, the time period was approximately 89 days and the gain was 57%. At a 50%-plus gain, you might want to take some off the table and let the rest ride with a mental stop-loss.

 

Chart #2: Double Moving Average Cross-Over Bullish or Bearish

2The DMA is one of the simplest Breakout indicators you can use. Although you can get some false alarms and the stock can whipsaw you in a volatile market, a careful trader can use the DMA profitability and with confidence. Use this strategy on a stock you don’t mind keeping for the long haul. To work this strategy, simply buy the stock when the 10 day Moving Average line crosses up through the 30 day line. Just having the price cross the averages can give you too many false signals, so wait for the cross, It gives you more confidence that a breakout and reversal can stick. To close the position, it’s really your choice, especially if you have a profit. You can close whenever the stock price dips below either average, you can set a profit/loss target than can be triggered anytime. But, if you’re making money, you might want to take part of your profits and let the rest run till you get a DMA down signal.

 

Chart #3 Triangle Breakouts: Upside

3When chart lines form a triangle Pattern, whether upward or down, they are actually off-square Support & Resistance lines. EMN, Eastman Chemical has been in a fairly tight S/R range since mid-August. The support is running just up slope from flat, but resistance has dropped from $83 to just below $80. A close above $79.50 will break resistance and signal another leg up. Based on recent volume and Fundamentals, the breakout would support a short-term target price of $88.00. However, if the breakthrough fails, it’s bad news for bulls. It’s also a healthier breakout when volume increases, the stock is in a long term uptrend as well as the overall market trending upwards.

 

Chart #4: Double Bottom – Bullish

4Interpublic Group (IPG) formed a Double Bottom between early August and late November, staging a nice rally in between but falling back to form the right side bottom. The price, despite gyrating from the 9s to 12ish, it was basically flat for the year. If the current rally continues and breaks through first resistance at $11.94, the Double Bottom will prove, once again that these squiggly lines on a chart have merit after all. Based on Fundamentals and the length between the double bottom points, a reasonable price target of $14 to $15.

 

 

Chart #5: Trend Channel Trading – Bullish

5A trend channel is comprised of two trend lines, one tracks the high closes and the other tracks the lows. Over time, the lines adjust to float right on the highest highs and lowest lows. It is yet another version of Support and Resistance, except with a twist. You don’t necessarily want the price to penetrate either line, but to stay between them. Then you time your trades when the price touches or comes very close to the line.

 

 

More charts soon to come!

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