Image Source: PexelsEvery day when I turn on the computer, one of the first things I do is go through my stock charts. I like it more than a kid likes ice cream. The world is full of potential as I view the various setups and consider how I’m going to approach my trading for the day.I use technical analysis – the study of stock charts – to make sense of all the price data that bombards traders and analysts every second of the trading day. Analysts can make technical analysis incredibly complicated, and they often do. After all, there are endless ways of analyzing price data.But the truth is, I don’t use 90% of it. What I find most useful when analyzing stock charts is pattern recognition.Today, I’ll review three of the patterns that I use regularly in my trading research service to help generate profits no matter which direction the market – or individual stocks I’m trading – is headed.
The “World Record Pattern”
The first one to take a look at is the ‘World Record Pattern,’ or the bull flag pattern.This occurs when a stock makes a sharp move higher (also known as the “flagpole”) and then consolidates for a short period. Once the stock breaks out of that consolidation, it typically moves higher by the same height as the flagpole.Here’s a chart of Doximity (DOCS) to show you what I mean. In August of this year, the stock jumped from about $26 to $37 in one day, creating a flagpole that was about $11 high. It took a breather for a few days, forming the flag, and then it continued higher.
To figure out a price target, you must take the height of the flagpole and add it to the breakout point. In this case, we’d expect the stock to reach $48 ($37 + $11). About two months after Doximity broke out, it reached the $45 mark.
On Oct. 23, I recommended closing the position for a 45% options gain in just 40 days. Without a doubt, the breakout of the ‘World Record Pattern’ is one of the clearest indicators of when a trader should buy. But what about when to sell?
The “Old Reliable Pattern”
The ‘Old Reliable Pattern,’ or the head and shoulders pattern, is bearish. It’s valuable for taking the emotion out of the decision to sell.’Old Reliable’ has been ranked the most consistent chart pattern – and for good reason. This chart pattern is 83% accurate in predicting a stock’s downward slide. It gives you a clear warning sign before your chosen stock begins its dive.The head and shoulders pattern features three high points. The second, or the head, is higher than the first, or the left shoulder. But then the third, or the right shoulder, fails to reach the head, and the stock’s trading volume decreases. This suggests that buying interest is drying up.Once the stock breaks the “neckline” (the line drawn from the bottom of the left shoulder to the bottom of the right shoulder), it usually slides lower. That means it’s time to sell.Here’s this pattern in action on Viatris’ (VTRS) stock chart. This was a rare occasion in that there were actually two right shoulders, but you can clearly see that the stock continued falling after it broke the neckline.
The “Power Channels Pattern”
To understand ‘Power Channels’ – also called ascending channels – it’s important to understand resistance and support lines. These are terms that traders use to describe price levels that act as barriers, preventing the price of the stock from moving outside of a specific trading range.The resistance line is generally the price that the stock won’t push above. You can think of it as the “ceiling” for the stock. The support line is the floor of the stock’s trading range. It’s the price where traders feel the stock is too cheap, so they start buying again.Here’s an example with Taylor Morrison Home Corp. (TMHC).On Oct. 24, I sent a notice to my readers saying, “The stock is bouncing off of the bottom of its channel. Let’s jump on the stock, expecting it to rise to the top of the channel in the short-term.” I then recommended an option play to go with it.
This Tuesday, less than three weeks after I recommended the stock, I sent another alert that said, “[The shares have] reached the top of the upward channel. That’s a good signal to grab our profits and move on.”
Readers had a chance to land a 49% gain in just 19 days on the options.Do you see now? Technical analysis isn’t so hard when you know what patterns to look for and you can recognize them when they pop up on a trading screen. They’ll help you remove the emotion from investing and give you a better chance to profit regardless of where the market – or a stock – is headed.More By This Author:Has AGNC Investment Corp.’s Dividend Gotten Any Safer?NAT: The Ship Has Sailed For This Shipping Company’s Dividend AbbVie’s Dividend Isn’t As Scary As It Looks
