Reader Chart Requests

Sep 13, 2007: 8:56 PM CST

Reader Glyn recently asked me to give my thoughts on the technical picture of a few stocks he is watching, including whether or not a possible triple top is forming in some of these candidates.

The stocks are Amazon (AMZN), IBM (IBM), Best Buy (BBY), and the China ETF (FXI):

Amazon.com Inc:

Observations:

  • Double Top chart formation
  • Completion of an “Impulse Buy” trade (target: recent price high)
  • Uptrend long-since confirmed (notice the ‘perfect’ pattern to the moving averages)
  • We have a textbook example of a daily “Fade the Gap” trade
  • Price is now at resistance
  • Price is now at an ‘exit’ point, but odds aren’t strong enough to warrant a ‘short-sell’ trade
  • Let price retrace a bit if you want to get long Amazon

Best Buy Co:

Observations:

  • Price is in a confirmed downward sloping (or ‘descending’) consolidation channel
  • Price recently tested the channel bottom and appears to be headed upwards to test the top
  • I have indicated a potential long trade (swing trade and small target only) for you to examine
  • Entry for the swing trade has already occurred, so the risk/reward is not as favorable as it was yesterday
  • Momentum divergence indicates buying pressure is entering the stock
  • Volume surges on the downside indicate either capitulation by retail traders or aggressive accumulation by insiders
  • The moving averages are in the ‘perfect’ downtrend pattern (and price is in a confirmed downtrend)
  • We could be setting up a “Bollinger Band Squeeze Play” that could allow playing for a larger target

IBM:

Observations:

  • The chart looks extremely similar to that of Amazon.com (AMZN) above
  • Semi-textbook “Fade the Gap” trade completed
  • Impulse Buy trade target achieved, though probably would have been stopped out
  • Nasty tag below the 50 period MA probably rinsed all stops before surging higher
  • Now at resistance – probably would not go long here. Wait just a bit longer for proper retracement
  • “Perfect” moving average pattern
  • Observed swing (sell) divergence in momentum and price
  • Volume is much lighter
  • Price may have the potential to pull back to $112 before heading higher. Might not make it that low.
  • Odds don’t favor a profitable short-sell trade, unless very aggressive. Best not to violate the trend structure

China iShares:

Glen asked if we are having a “Triple Top”. Price has tested near $155 three times recently, but I would not call this a triple-top. I think in terms of price ‘swings’ and would consider the recent action to be the work of two price ‘swings.’ I would want to see a bit more distance – and pure swings – before I would refer to this as a triple top. Resistance is strong at that level, indeed.

Price is in a confirmed uptrend and recently experienced a “Power Sell” swing which probably lured in short-traders who were steam-rolled as price rebounded extremely strongly in a “Power Buy” swing. Price has recently become very powerful and volatile, and price is consolidating to make-up for the recent surges both in buying and selling pressure.

It’s best to swing trade or position trade iShares only, as price is rather choppy for US traders due to exchange hours and charting software limitations.

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(Disclosure: I have no positions in any of my accounts in any stocks mentioned above)

7 Comments

7 Responses to “Reader Chart Requests”

  1. Dan Says:

    Thanks for the charts Corey. Can you expand on “Bollinger Band Squeeze Play” — I’ve been reading
    up on Bollinger Bands and if I get the ‘gist’ as the band become more narrow (less volatile), the stock
    is possibly setting up for a significant increase in price??

    thanks again for your time,
    Dan

  2. Rich Strehl Says:

    Corey,

    I like the new logo.

    I hope you’ve been doing well.

    Take care,

    Rich Strehl
    Active Trader

  3. Corey Rosenbloom Says:

    Dan,

    I’m glad you asked. The Bollinger Bands offer many types of analysis, including that of volatility in regards to price expansion/contraction.

    The “Squeeze Play” Trade takes advantage of this fact through the visual narrowing of the standard deviations in price which occur through multiple days of price-bar overlap. In other words, we want to see – through the indicator – a condition where price is likely to enter a period of expansion, though we may not always know ‘out which side’ price will break. Many options only traders will tell you that “volatility is much easier to predict than [price] direction”. I hold true to this facet.

    The “BB Squeeze” trade sets up after a marked increase in range expansion and standard deviation (which is what Bollinger Bands measure – two standard deviations (of the last 14 days usually) away from the midpoint).

    While there are a plethora of examples I could show, I would refer you to the chart of Amazon above around July 2007 when price was consolidating and the Bollinger Bands narrowed in relation to previous levels. The resulting move was actually a gap, indicative of a strong price expansion (or demand imbalance – earnings related). Most moves out of consolidation are not this violent.

    Trader and Author John Carter has a particular trade he discusses that is a specific type of Bollinger Band squeeze, which occurs when one plots both the Keltner Channels AND the Bollinger Bands on a stock. A squeeze play takes place when the Bollinger Bands contract INSIDE the Keltner Channels, and a trader should enter an order inside the consolidation, or place a bracket order outside recent consolidation. It’s interesting.

    Hope that clears it up a little bit. Most of what I do is playing (trading) for small price targets, but specific setups, including the Bollinger Band Squeeze Play, can indicate that I should trail a stop and play for a larger target. It is a “Breakout” Trading strategy.

    Yours,

    Corey

  4. Corey Rosenbloom Says:

    Rich,

    Thank you! I spent some time designing various ideas I had. I still want to incorporate a deer head – particularly one that looks scared – into the logo. I’m still working on that.
    I have an alternate logo on the original homepage at http://www.afraidtotrade.com if you want to look at it as well.

    Things are good but busy. I hope things are excellent with you as well.

    Yours,

    Corey

  5. Jack Says:

    Great post. I have added you to my digg bookmark…

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