Thursday, April 9, 2009

Looking For Stocks Not Confirming New Highs in the Broad Market

Click on Chart to Enlarge

I thought I'd take a little break from the broad market averages today since it is just a little waiting game on that front now as far as blog trades go. Instead I'll talk about a subject I mentioned back in early January.

Whenever a rally in the stock market is maturing and breaks out to new highs like today, I like to look for stocks that are not confirming that breakout. These stocks may be weak and lead the market down when a correction starts again. I think this is also a sign of a market topping, when you see significant numbers of stocks failing to make new highs with the market.

There is a specific pattern that I look for when analyzing the charts and considering a trade on stocks that are not confirming the breakout. The pattern is a vertical decline off the recent highs followed by an orderly ABC type correction back up toward the highs as the broad averages break to new highs. The chart above is CAM which is an oil field service stock that I have followed for several years and traded a few times, and it is showing exactly the type of pattern I look for.

This chart is a 30 minute chart and comprised of the last few weeks of action. I will not go into detail on the chart since you can look at it yourself, but I will highlight the cluster of resistance in the 24.60 area. That is the area of the initial unfilled breakaway gap down off the high a couple weeks ago, and a high there for this pattern would complete a Gartley pattern ABC correction which I consider very aesthetically pleasing to look at from a trading standpoint.

Here's what I would look for to trade this......I would like to see one more high above today's high which shows bearish divergence on the MACD 15 or 30 minute charts. Then either enter short immediately at that point with a stop at 25.60 (above the high of the entire pattern), or wait for the green trendline (of wave C) to be broken, and enter at that point. If using the second entry strategy, you could move the stop down to the highest point of wave C to get a better potential risk and reward ratio.

For exit, the larger pattern is suggestive of a move down to the 19.00 level within about 2 weeks time, but I would try to get a minimum of 3:1 reward on risk as defined by your entry price and stop loss.

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