Friday, July 24, 2009

A Look at YUM, Long Term Gartley Pattern and Possible Breakaway Gap Down

Click on Chart to Enlarge

This is YUM which owns several fast food restaurant brands. I have followed this stock since 2006, but only traded it once (for a loss in 2006). I have put a bunch of notes on the chart highlighting the importance of high volume breakouts, basing patterns, and successful basing patterns forming where the low of each successive base is at a higher level.

For long term reversal there are some classic signs....

-sloppy, jagged, and deep corrections (say 40% or more) after a series of more standard rounded shallower basing patterns

-the breakout to new highs from a sloppy base happens on volume that is very low compared to past breakouts

-A final tell tale sign is often when the most recent basing pattern does not even attempt a breakout, and price gaps down on heavy volume and undercuts the low of the base

Some of those signs were present on YUM last year. Now what we have seen is a 5 wave type of decline off the highs from last year, followed by a Gartley pattern ABC retracement. This is often a major reversal pattern. Additionally, on the recent earnings report, the stock gapped down off the highs on the heaviest volume in years. I would guess that this is a breakaway gap down. That is another classic topping sign - when the stock makes a very large gap down on the heaviest volume compared to entire bull run preceding it. Institutions are exiting en masse.

The last 2 weeks, the stock has been consolidating below its 20 day MA despite a stretch of market strength, the likes of which have only been seen once every few decades. I am strongly considering a short entry on this stock, and may even track it for blog purposes for those who have interest in some longer term type trades.

Also there is a somewhat similar bullish bottoming pattern occurring on TSO, which I also am considering a trade on after a short-term pullback. The great thing about these types of trades is not the bang-bang gains, but the potentially huge reward relative to risk over the course of a few months. I'll post again if I do make an entry.

Also, as a follow up, I am cancelling the buy stop orders on NFLX since it gapped down and is getting sold pretty hard thus far today. Because of that I will probably not even look at buying on a handle formation, as a large volume gap down in a handle is probably a bad sign for the basing pattern.

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