A few nice educational charts for May 17

May 17, 2007: 8:35 AM CST

Caterpillar:

cat-may-17.png

Caterpillar (CAT) recently pulled back (sharply, might I add) to the rising 20 moving average and found (temporary) support.

It’s still on a down day (currently) with a nasty gap, but aggressive trend traders (and swing traders) could have (or still can) establish a position here with a tight stop should the average be breached on high volume (which would signal a trend trading exit for all those long CAT since February or earlier).

We see a momentum divergence with price (in terms of swing highs) so this serves as a caution point (not enough reason to exit).

Goldman Sachs (GS)

gs-may-17.png

We see consolidation at the moving average and should be expecting an expansion move (in either direction) yet odds favor expansion upwards (because of the trend/price structure).

Here would be a nice place to consider entry IF you wish to trade this stock long and believe in its fundamentals or sector strength (only you can determine this).

We do see a momentum divergence, which is what I’m seeing across many stocks.  Again, this is a warning, not a reason for a counter-trend trade.

Alcoa (AA):

aa-may-17.png

Alcoa has no doubt shown some impressive relative strength recently (in terms of Dow components).

Observe the new price and new momentum high (recently) suggesting a higher probability for higher prices following a pullback (which is occurring).

Now is probably not the time to enter Alcoa if you’re a swing trader – instead wait for the pullback.  Better yet, wait for the “Impulse Buy” trade I describe to set-up (when price pulls back to the rising 20 period moving average following a new momentum high.  Play for only the most recent price high).

AA has increased roughly 30% since the beginning of this chart (January).  For any stock, this is an impressive feat but especially for a Dow Jones component!

Finally, Apple (AAPL)

aapl-may-17.png

Apple has been highly praised in the media and by analysts (and traders) and we see its impressive trend-expansion (run-up) of $20 since late April and $30 since February.

Notice that we are making new price and momentum highs in the stock, indicating strong momentum and probability for higher prices later.

I’d still like to see the pullback, but realize that in the strongest stocks, they don’t often bear fruit – sometimes you have to grit your teeth and buy at high prices (buy high, sell higher).

I’d recommend following this stock and seeing if it pulls back and taking a position if the stock fits your particular strategy.

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