The following was taken from Jeff Cooper's interactive course book, Intra-day Trading Strategies. This is from Chapter 6 "When Stocks Don't Behave as They Should."
***It is reassuring when the patterns set up an outcome we expect–especially when we have taken a position in the stock based on those patterns. But there are times when stocks do not seem to be behaving as they should.
Case Studies- Digital River
Take a look at the daily chart for Digital River and I’ll show you what I mean (figure 6.1). Here, I like to explain this as a case of a stock putting its money where its mouth is. The downside head and shoulders also forms a large cup and handle, so large I call it a stein and handle. It’s simply far too deep to be called a typical cup formation.
A lot of day traders and swing traders can lose money when a stock forms up like this. Why? Because there is a lot of volatility and apparent trends going on here, but they have not lasted. You have the numerous triple tops forming over this period, and the actual breakout point is called the rule of 4 breakout. This was the fourth attempt to breakout above the declining resistance line. Note how
that resistance has angled downward; this is an angular version of the rule of 4 breakout.
The rule of 4 breakout often is the first step in a very rapid move. The typical chart analyst might not have picked up on this by focusing too closely on smaller time frames, which day and swing traders tend to do. With that in mind, it also makes sense to step back and look at how a trend is developing over a larger time frame. In this example, several signals came together at the right time. The rule of 4 breakout, the inverted head and shoulders, and the small gap at A. You could look at figure 6.1 as a series of false moves, but you should also remember that false moves lead to fast moves. In fact, a look at the hourly chart from the gap-‘n-go point and forward for three days is interesting as well for what it reveals (figure 6.2). The initial step was a very strong thrust, followed by a pause lasting nearly two days. But note how it ended: with a 14th bar pivot. Then the stock just continues upward.
MicroStrategy
Let’s look at another example. The daily chart for MicroStrategy provides you with another pattern of a stock not doing what it should (figure 6.3). I would have expected the stock to continue downward at A after the 1-2-3 and 180. That’s the sell signal. Instead, the price took off at point B in spite of what the pattern implied would happen. So as I cautioned you before, nothing gives you a 100% guarantee.
Borg Warner
Here’s another example, seen on the daily chart of Borg Warner (figure 6.4). First note the 50-day moving average, a steady line with the running cup and handle forming classically: cup below,
handle above. The handle forms up with what I call a flying wedge. That’s a wedge that looks like it’s the preamble to the stock taking off. The borders are clearly downward and the pattern lasts seven bars. That’s a strong signal and, sure enough, the stock gaps up above the 50 DMA and takes off.
When you see the cup and handle and the handle wedges down like this, it is a sign that a strong upward move is on the horizon. We can also see just how strong the gap was in this case by looking at a micro version of the move on the 10-minute chart (figure 6.5).
This rather large gap raises another important question. Let’s say you were fortunate to buy in before the gap. So when do you get out? Look for symmetry, that’s where you find the answer. The gap was two points, followed by a two-point run. That kind of symmetry—where the point move mimics the gap distance—is a good signal that it’s time to take your profits and get out.
Want more from Cooper? Buy this course book and DVD now!
Comments