Pattern Recognition

Technical analysis is part science and part art, and when you’re talking about art, some people “have it” and some people just don’t.  Look, I couldn’t draw you a freaking circle by free hand, I just don’t have the motor skills with my hands to do that.  Going ever further, if you asked me to draw a picture of someone, it would look like they just got run over by a bus.  But I digress.

The science aspect of technical analysis and stock operation can be learned through simply reading and learning the material.  You don’t need to spend big bucks to get your MBA or hire a trading coach.  But the art of trading is something that can only be learned by being in and around the market long enough, and even then, some people inherently have more skill and a better disposition to succeed .

I had the chance this week to see one of the most talented market operators and technical analysts at work.  He’s a pattern recognition savant, he doesn’t use any fancy software, just his eye for what a stock is doing based on its price and volume pattern.  Watching him just reinforced my belief that certain people are able to internalize the information the market is throwing at them, and discern patterns in the data, in a split second.

I want to share a pattern with you that I have come to love, one that always catches my eye when running through hundreds of charts while I do research.  I have no clue what this pattern is called, or if it even has a name, I just know it works.  The example I am going to share looks at a current trade that I’m in involving New York Community Bancorp $NYB.

On February 11th $NYB broke out of a range it had been trading in above the 20 day moving average for about a month and a half.  The stock hit my screens at that point, after the desired entry point had passed.  I continued to watch over the next few weeks as NYB began to consolidate its gains on light volume.  At this point in time I was watching for two things to happen, the 20 day moving average to provide support, and the top of the range from back in January and February not to be violated with an ugly candle.  The stock acted accordingly and bounced off the 20 day on 2/26, followed further tests on 3/2 – 3/4.  Each time the stock bounced nicely and the volume continued to be weak.  On 3/5 the stochastics reached a low of 36.71, a level at which the stock had bottomed back in early February.  As well, the 20 day moving average began to turn upwards.  The next Monday on 3/8 I struck.

I took my position at 15.72 as the stock tested some significant resistance.  My stop was set below the 20 day moving average.

It was straight up for there on increasing volume for the next few days.  The secondary breakout took place as a wall of sellers lined up at 16 for a few hours, they were taken out in short order.  A pullback to the 5 day moving average in red on 3/12 gave a nice test to the run, which was met with more buying and a new spot to place a stop under.

Here is the key to this pattern, you want to see the stock consolidate on light volume and not slam into that 20 day moving average with large negative candles.  The action around the moving average is of primary importance because it allows you to place a hard stop below it and decrease your risk.

Learn this pattern.

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see the Disclaimer page for a full disclaimer.


blog comments powered by Disqus