A couple of weeks ago I posted a chart on Taser (TASR) and pointed out that sellers were about done and it was a matter of time before buyers took control. What are the clues? The selling volume was drying up with each day and there was a decent probability that the stock would form a near symmetrical double bottom base. Taking a look at the chart, you see that the second bottom spent an almost identical amount of time forming the bottom before buyers took control with a surge in volume. Now it’s important to realize that charts won’t usually form quite this symmetrically, but if you are familiar with the shapes of the most common chart patterns and can spot volume dry up/buying surges you can often times predict future price movement. Will you alway be right? Absolutely not! It’s all about probability and using as many pieces of information in order to steer the odds of success in your direction. Here’s a current chart of Taser:
Let’s take a look at another example of predictable price movement in the chart of CALM (Cal Maine Foods). During the low card diet craze of last year, this egg producer ran up over 1000% in just months. Since late March it has been carving out a nice looking doube bottom base.
Again, notice the symmetry on either side of the middle peak of the W formation? Notice the the dry up in selling volume on both sides before buyers take control?
In both the case of TASR and CALM, you’ll notice that the formal CANSLIM pivot has not been reached… but I believe there are certain times when it’s ok to buy before the pivot: If buying before the pivot the following conditions should be met:
* Market in uptrend
* Decreasing selling volume, surging buying volume
* Support levels are near (within 10% of purchase price)
* Base has exhibited quite, predictable price action in the past (no erratic bases!)
By becoming familiar with common price patterns, you will soon be able to predict future movement and your success rate will dramatically improve. Start studying those charts … as many as you have time for! Are there unpredictable price/volume patterns? Absolutely.. there are many more unpredictable patterns than predictable patterns. Stick with predictable patterns.
Here are a couple of examples of erratic, unpredictable price patterns that should be avoided.
Would you be comfortable with your hard earned money in this stock? I know I wouldn’t!
How about this one?