A picture Is Worth A Million Dollars
Charts help us to see what’s going on in a particular stock. They filter the conflict for emotional, reasonable, and even manipulative decisions into a clear optical display or the judgment of demand and supply.
Mark himself never bets on the fundamental ideas alone without any confirmation from the charts. First, he uses charts to ascertain the current trend of a stock. In other words, technical analysis facilitates him to qualify candidates for his watch list. Then he uses charts to decide the entry time.
There are three schools of thought. The first group consists of technical analysts who rely only on the price and volume action. The second group is that of pure fundamentalists who believe that every know-how lies in a company’s fundamentals. The third group comprises techno-fundamentalists who exploit both technical and fundamental analysis. They bank on price and volume action along with the fundamentals. A healthy mixed approach exploits charts as well as fundamentals to boost the probability of success.
Chart patterns reflect the effect and not the cause. The demand and supply picture does not command the market but human behaviour does. Human behaviour is the same and is not prone to much change in the future. Hence, chart patterns continue to be powerful tools in clocking trade entries and exits. The key lies not in knowing exactly what a stock is going to do but in knowing what it should do. Then it’s a concern of defining whether the proverbial train is on schedule.
Knowing what to expect enables you to detect whether a stock is acting correctly or incorrectly in the current situations. When you know how something is ought to perform, but it doesn’t perform in that similar way, the exit decision is much easier.
The initial and most essential information that charts show is the prevailing stock trend. You should select only those stocks that exhibit proof of being favoured by institutional buying. Your goal is not to be the first one to buy but to look where momentum is picking up and the risk of failure is fairly low.
If you enter too early in a trade, you run the risk of the stock restarting its downtrend. However, if you are too late, you run the risk of buying a stock at the late stage which is known to everyone and susceptible to failure.
A widespread characteristic of almost all constructive price patterns is a contraction of volatility supported by certain areas in the base structure where volume contracts reasonably. To demonstrate this Mark uses the concept of volatility contraction pattern (VCP).
VCP is part of the demand and supply format. Its main function is to establish an exact entry point at the line of least resistance. The stock should move from the left side of the price base with greater volatility to the right side with lesser volatility.
The instant differentiating features of the VCP are the number of contractions that are formed (generally between two and four), their relative depths, and the level of trading volume associated.
As a stock corrects and heads downward, certainly some trapped buyers who bought around the stock’s previous high, are now sitting with a loss. With the passage of time and growing losses, many of these buyers would be pleased just to reach breakeven. This creates an overhead supply.
Unlike the trapped buyers, there are also buyers who were fortunate enough to bottom fish and accumulate huge profits. They also add to the supply issue. As the stock trades near its old high again, the profit-takers feel the urge to sell and book their profits. All this selling causes a price pullback on the right side of the base.
Just because a stock is trading down 50-60% off it's high doesn't mean it is a good bargain. First, it may imply that the company or the industry is facing a serious fundamental problem. Second, even if there are no fundamental problems, it gets burdened by the trapped buyers. Finally, the more a stock decreases, the more profit takers will be waiting to sell if the stock rallies and intersects overhead supply.
You will be more successful if you focus on stocks that correct the least versus the ones that correct the most. Under most circumstances, if a stock corrects more than two to three times the decline of the general market, it should be avoided.
Just before a price correction or consolidation begins, a price spike occurs on the left side. This may become news and cause the stock to pull back, especially if the broad market begins to correct.
A proper pivot point indicates the fulfillment of a stock’s consolidation and the threshold of its next advance. A pivot point is a price level that calls for action and is often called the optimal buy point or the line of least resistance.
Once a stock breaks through this least resistance line, there are the greatest chances that it will move higher in a short period.
Once the stock breaks this pivot point successfully, the stock price should hold its 20-day moving average and should not close below it. The pattern should not get broader with more up and down movements.
The cup completion cheat, or 3C, is a continuation pattern and marks the earliest point at which you should try buying a stock.
The clue is to identify when the stock has bottomed out and has started a new uptrend, in correspondence with the primary stage 2.
The cheat setup usually develops during a general market correction.
Making the Turn
A.Downtrend- The stock price will undergo an intermediate-term correction that takes place within the context of a longer-term stage 2 uptrend. This can take over several weeks or months, and it is natural to encounter huge price spikes along with the downtrend on enhanced volume.
B.Uptrend- The price will strive to rally and halt it's downtrend. At this point, the price and volume action does not confirm that the stock has bottomed and got into a new uptrend. The price will start moving up, regaining one-third or half of its previous decline. However, the overhead supply created during the downtrend will be strong enough to slow the price increase and create a halt or retreat.
C.Pause- The stock will pause for several days or weeks and form a plateau area, which should be encompassed within 5-10% from high point to low point. Here, the stock moves above the high of the pause and is ready to be bought. A typical indication for the breakout of the stock is when volume dries up drastically, escorted by price tightness.
D.Breakout- Place your buy order as the stock rallies above the high of the plateau area. The stock is now considered to have made the turn which means that it has made its low and the trend is now up and back in correspondence with the longer-term stage 2 primary trend.
The riskiest time is to trade when a stock is trying to bottom. While searching for the bottom, it can blow back and forth, making it a very volatile period. Trying to pick up a low can be extremely frustrating and expensive.
To be able to distinguish, one of the most significant setups you can learn is the power play, also known as a high tight flag. There are two reasons why Mark also calls this a velocity pattern. First, it requires enormous momentum to qualify. Second, this setup can move the quickest in the shortest period; momentum creates more momentum. This pattern is a sign of a dramatic shift in the company's prospects.
The following norms must be met to equip as a power play:
- A fierce price move initiates on huge volume that fires up the stock price by 100% or more in less than eight weeks. This commonly happens after a period of comparative inactivity.
- Then the stock price moves sideways in a fairly tight span, not correcting more than 20-25% over three to six weeks.
- The stock must exhibit VCP characteristics or the right price action should not correct the stock more than 10%.
The key to earning huge money in stocks is to coordinate supporting fundamentals with effective price action during a healthy market environment.