Wednesday, January 28, 2009

Chart Analysis

Lets start this post by looking at a days worth of market activity on a stock I own: NFLX.

There is a lot of stuff going on in this chart. So much that I had to write it down.

The first candle indicates a very strong open, followed by a very volatile pull-back. Then, buyers went to work and created a powerful rally. The next segment, that relatively flat hour and a half, deserves considerable dissection.

First, that segment can be referred to as "consolidation" which is a continuation pattern (the preceding rally is expected to continue). It's like taking a break to catch its breath after such a strenuous run. This pattern is an indication that the rally is pausing but not ending.

Even deeper analysis of that segment of time shows a left and right bump (the shoulders) and a centered, taller peak referred to as the head. Voila! Its a "head and shoulders" pattern.

You can Google "head and shoulders" if you like, it is well known among seasoned chartists. Better might be to see this Chart School page.

Since head and shoulders is a bearish indicator, we should expect a pull-back, and, yes, in fact it did. If you measure the pattern height and project it below the pattern you will have estimated the depth of the pull-back. Fun isn't it!

After the H&S completes, the morning rally does continue but seems to be limited. Price builds but can't seem to pass an invisible line in the sand. That's called resistance. Resistance is an impediment to further rally attempts.

When resistance is repeatedly tested, it will eventually fail. In this instance, the tests are becoming more frequent. That said and understood, one could see with confidence that the stock is poised for a powerful rally. I'm in! Are you?

1 comment:

  1. mike,
    It's always nice to have a chart on hand when explaining t/a. What I like in this specific chart is the absence of long upper shadows on the upswing(s). They're there, but not imposingly so. The 10:30 volume would have worried me. If this were confined to intraday, I hope you bought in between the 35- 35.4 candles.