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A free Pristine service published on select Mondays
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May 14, 2012 |
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Charts Don't Lie
If you have ever had a trade go sharply against you on a news announcement, you know the pain. The thought that follows is, how could I have avoided it? Holding overnight or swing trading positions comes with that risk, but the price action prior to the news can warn the trained chart reader. Here's an example.
On May 2nd after the close of trading Prudential Securities (PRU) announced a large quarterly loss that caused institutional selling in the morning. How do we know it was intuitions selling? Gaps lower on the type of volume seen that day can only be caused by large positions being sold, not by day traders. The price action that preceded the heavy selling was a clear warning sign.
Let's review it. |
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On April 9th PRU gapped lower after trying to move through its current highs three times. This was the first sign of change. Now a gap lower doesn't always mean prices will continue lower. However, when prices don't recover quickly from a bearish day - like they did when they were trending higher on the left side of the chart - take note of it. After the gap down, PRU traded at price support and could not move up to fill that relatively small gap. The inability to bounce from support at all is a bearish sign.
The second clear warning sign was the Topping Tail bar (TT) that moved above the prior day's highs. During that day buyers were in control early on and were able to overcome what was resistance. However, sellers took advantage of those higher prices and (could they have known the coming news?) killed what was looking like a bullish day. Lesson here is not to assume that a bullish or bearish candle will still be so prior to its close.
By this time anyone long PRU must have instinctively known something was wrong. But without knowing how to read the warning signs it's only a guess. Two days later the warning that was being signaled prior was hitting longs hard. PRU gapped sharply lower on heavy volume that was followed the next day by prices cutting through the 200-MA like it wasn't there.
This is where those without a trading plan or the discipline to follow it start rationalizing the bad news and the growing loss. I know this because virtually everyone (maybe everyone) that has traded or invested in the markets has experienced this. It's often the motivation to get an education and stop risk money based on a seat of the pants approach.
What followed near the end of last week appears suspect to say the least. On Thursday, several analysts' recommendations promoting PRU came out. Based on the prior bearish price action we know there are intuitions and traders caught long and holding loses in PRU. Could the recommendations be an attempt to help drive prices higher to unload shares? It's happened before.
The signs of selling or buying prior to a move are there ahead of time. These price patterns are what Pristine traders use for their buying and selling decisions. The added combination of other concepts taught like the trend, support/resistance, relative strength/weakness, price reaction to these and other concepts are what increase the odds being on the right side a trade or avoiding large losses.
You can learn more about Pristine's approach to trading and investing in this week's Free Webinars.
If you've taken the Trading the Pristine Method (TPM) seminar, I will be teaching the Advanced Technical Strategies (ATS) this coming weekend. E-mail counselor@pristine.com to enroll.
All the best, |
Greg Capra
President & CEO
Pristine Capital Holdings, Inc.
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