• Trading Information - Buying Into a Pullback
• The Equilateral Triangle
• Trading Chart Patterns
• Share Purchase Plans
• Yellow Cake…Anyone?
• Read the tape – it can tell an interesting story

In the stock watch reports, we aim to identify trading opportunities in the market using technically based chart patterns. Now, I certainly don’t proclaim technical analysis to be the Holy Grail however it does provide another tool to improve the probability of a successful outcome.

One chart pattern that has been popping up regularly in the reports is the ascending triangle pattern. This pattern aims to pick stocks in an uptrend that have taken a breather or paused for some reflection. It’s important that we understand the psychology behind a pattern to get in tune with the markets. An Ascending triangle is quite simple to understand but first let’s look at an example; Extract Resources (EXT) has been a favorite since we first spoke about it back on the 1st June this year.

From December 2008 we saw a significant run up in EXT from below $1 to a peak of $5.40. A couple of points on the rally; Volume was building throughout the run with a significant spike towards the end of the rally. Had you held a position in this stock, watching the fall in volume over the last three days of the move would have given you a clear indication that the rally was about to falter.

As the rally faltered, we saw a volume spike on a large down day as traders scrambled to get out at any price after seeing their open profit erode. One analogy that is often used in the markets is penguins following each other off the ice shelf. In this example however the volume and aggressive nature of the sell off didn’t last long as new buyers (who may have missed the rally entirely or could of possibly sold out earlier predicting a pull back) found value in EXT at $3.50 (just after hitting $5.40), this supported prices pushing it back up to the high around $5.40.

Those trader’s who failed to get out last time, took this opportunity to get out second time around. This occurred twice before a break occurred on the third time.  A break occurs when there are more buyers in the market than sellers, with the buyers prepared to pay more for the stock. There were a couple of days of indecision before momentum really kicked in and volume intensified. Note; Its important to look towards volume to underpin the move higher. Like other patterns in the market, we’re not looking for perfection, but rather a pattern that has the likely hood of occurring time and time again.

By understanding the psychology of why certain patterns occur, it helps us to visualize other market players and predict their likely action.

Some of the recent stocks we have suggested in Stockwatch that generated this chart pattern include;

SEK – Suggested on the 5/10/09. Due to a number of previously weak closes, it was prudent to buy once the stock closed above the breakout level. The trade target is equal to the depth of the pattern and added to the breakout level. This was achieved in a very short period of time however this is not the norm.

Dow Jones – Suggested on the 12/10/09.

Other stocks worth looking at now could include ANZ, ASX, WES, WOW, DJS & AWE.

Over the coming weeks we will cover further chart patterns and discuss them within the weekly Stockwatch presentations as they unfold in the market.