Okay, you’re probably thinking. What in the world does the alphabet have to do with where I buy stocks?
Plenty! Many of the price patterns we see on charts resemble letters of the alphabet. Further, if we know how to identify these “price letters,” and how to take advantage of their signals, we can be more profitable traders and investors.
When we look for stocks or ETFs that fall through downtrends, then slow their descent, form bases, and prepare to jump into uptrends, several of the price “bases” that form the foundation for potentially powerful breakouts into uptrends are easily identified because they are shaped as letters—J, L, U and W.
I particularly enjoy trading W-shaped bases. (By the way, this can be a dandy bottom-fishing strategy.) As long as you know when to enter, and how to manage your risk, W- bases can provide great entry opportunities. And there’s a good reason for this . . .
“W” bases are also referred to as “double bottoms.” They form like this: A stock or ETF (or other financial asset) falls in a downtrend from prior highs. It continues lower . . . maybe tumbling 10%, 20%, 30% or more.
At some point, sellers are exhausted. Then buyers step in. Supply and demand begins to even out. With sellers pushing price down, but new buyers holding price up, price stops falling.
If the new bulls absorb more than the available supply at the low price, demand eats through supply and price begins to rise. At some point – which forms the mid-point of the W — the new bulls tire and the bears come back in and push price lower again. This scares out many of the “weak hands,” or recent buyers, and they retreat. Result? Price retraces part—or all—of the prior move down.
This is where the rubber meets the road. If price only falls part of the way to the prior low, but then new buyers come in and shoot price higher, this new-buyer interest is bullish for the stock. Alternatively, if price continues down to its prior low and stops . . . then finds new buyers and starts higher, this is also bullish for the stock. In both cases, fresh buyers who think this is a great buying opportunity are absorbing supply – and are willing to pay higher and higher prices for the stock. That will jettison price back up to the mid-point of the W, and perhaps shoot it into a powerful and profitable uptrend.
Please know that in order to form a “legal” double bottom, price needs to complete the W-shape by rising back to the mid-point (which may offer resistance) and then close above it.
Now, here’s my good reason for liking double bottoms: When the stock retreats to the prior low (second leg down of the “W”) and then holds at or above the prior low, it tells me that buyers are willing to support (buy) at that price. Call it a little insurance policy, if you like. I call it “confirmed support.”
Is that confirmed support an absolute guarantee that the stock’s price won’t fall below the lows of the W now or ever? Of course not. There are no guarantees of anything in the financial market! And, should my stock head back down to those lows, and slice below them, I am out.
Still, the confirmed support in the base formation gives me a little extra comfort, because the initial low was tested and it held its ground.
Below you’ll see a daily chart of Health Net Inc. (HNT), a health care services company that created a W-shaped base in late 2013 and into 2014. The second low was slightly higher than the first low, indicating new bulls were anxious to buy. (Some traders will also refer to this base formation as a cup-with-handle.)
Health Net Inc. (HNT) Daily Chart
Chart courtesy RealTick
During the first of the year, Health Net completed the W-shaped double bottom pattern and shot higher, giving alert traders and investors a good buying opportunity.
Next, Health Net developed another W-shaped base atop the 200-day moving average (black moving average). When it roared through the resistance highs formed with that base (dotted line), it offered additional buying opportunities and went on to score high gains for its investors through the summer months.
The next time you study a price chart, you may want to look for any “W’s” that led to eventual upward price moves.
And, please know that the alphabet and some of its letters can come in handy when we are looking for buying opportunities in the market. We’ll talk about more of these letters in the future.
On another note; please join me for an exciting, seven week online course I will present in December and January: “How to Bottom Fish Like a Pro.”
Bottom Fishing is a unique strategy in which in which traders and active investors target shares of a high-potential– but undervalued– stock or ETF that has “fallen from grace” due to a broad market downturn, discounted sector, deteriorating company fundamentals.
The savvy market player knows how to spot when the fallen stock’s fall, or downtrend, is about to end and the bottoming price action is in place.
Next, he or she identifies the stock’s basing action and potential accumulation by institutional traders and investors (very valuable!). Finally, our savvy bottom-fisher plans where to buy, where to place protective stops, and targets his initial profit target.
When we “bottom fish”” and execute our trades appropriately, we achieve the goal dreamed of by most traders and investors the world over – to buy low and sell high.
Many traders and investors who attempt bottom fishing without the proper knowledge simply take “pot-shots” at downtrodden stocks they see mentioned in the news.
This kind of “buy and hope” strategy can lead to losses!
Please join me for “How to Bottom Fish Like a Pro,” and I will show you to “go bottom fishing” successfully. In a step-by-step,“bottom-fishing expedition,” you will discover how to how to spot the most promising stocks and ETFs that have tumbled from their highs, how identify a true price bottom from a “tradable bottom,” (there’s a difference!), how to manage risk and where to set protective stops, and how to maximize profits.
To register for my FREE interview with Money and Markets own Mike Burnick where I reveal my strategies for the upcoming course, click here!
Don’t miss out on this brand-new webinar series that will help boost your bottom line in the New Year!
Until then, keep green on your screen!