3 False Set-Ups Where Patience Paid Off

04/12/2012 8:00 am EST


Jeff White

Founder, TheStockBandit.com

The lack of real trend confirmation helped Jeff White stay on the sidelines for these three stock set-ups gone bad, but traders who tried to get in early likely crashed and burned.

As a pattern-based trader, I use a lot of trend lines on my charts. When you look at my charts, the only indicator you’ll see is the 21-period moving average of volume, which is the running one-month volume average. 

Beyond that, it’s just price, volume, and trend lines around the patterns I see in price. I keep it simple.

Confirmation of those patterns is what I require before taking entries on 99% of my trades, which means price crossing through a trend line. The way I see it, until that line in the sand is crossed, nothing has changed. The rest phase or pullback must not be done until then. I may detect price perking up or volume percolating, but until the trend line breaks, the set-up cannot be fully embraced as a positive change of character.

See related: How to Trade Less and Make More

Right now, there’s an excellent example in the chart of Amgen (AMGN) that shows why waiting for that trend line break can mean preserving both capital and clarity. The stock is bullish, no doubt about it, as the intermediate uptrend has remained intact since it began last August. Since then, we have a series of higher highs and higher lows.

In recent weeks, the stock has been pulling back quietly with some minor profit-taking leaving price drifting lower since the early-February peak. The prior breakout was around $65 (in January), so it could be that the stock is in for a test of that zone. Who is to say otherwise, and until a break occurs to suggest the stock is back on the move, who cares?

Currently, the stock is floundering around beneath a very valid trend line, but no less a trend line which has yet to be crossed.

Click to Enlarge

Exxon Mobil Corp (XOM) is another example, as just recently, the widely anticipated push through the $88 level never happened as recently as last week. The stock has since fallen out of its channel to the downside, and waiting on this set-up was the best option.

Click to Enlarge

Ford Motor Co. (F) is another example, as the $13.05 resistance has never being crossed, despite the stock having approached multiple times of late. Those who bought in early in hopes of getting in “cheaper” and ahead of the breakout actually paid up. The stock has exited its trading range to the downside, leaving premature buyers in what I’d call the “hurtin' for certain” department!

Click to Enlarge

Traders by and large love to predict what’s coming, and often will take anticipatory trades as such.  Doing so can be an expensive way to get caught in a stagnant name.

Carefully consider whether a stock is truly getting on the move before committing capital to entries. It could be that waiting a little longer provides you with not only better prices, but better-defined exits as well.

By Jeff White of The Stock Bandit

  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on STOCKS