Would You Buy a Stock With a Chart Like This?

02/06/2013 6:00 am EST


Greg Capra

Co-Founder, MasterTrader.com

There are different criteria to consider when evaluating a stock and they depend on your trading style, notes Greg Capra of Pristine Capital Holdings, Inc.

In this Chart of the Week (COTW), I want to show why one trader who is focused on swing trading would never consider buying and another that is focused on intraday trading would. However, both traders would initially view the chart as bearish and both may have it on their watch list for a short sale the next day.

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In the above daily chart, we see a stock that has broken down under major support (MS), the 20-MA and the 200-MA. While the stock did form a bottom tail (BT) on the break lower, it never was able to trade above that high for several days. Over those days of basing, the stock formed two topping tails (TT) as buyers tried to get the stock above the 200-MA. With the formation of the last TT, the price action did suggest that the stock would move lower and possibly the next trading day. For that reason, both the swing trader and the intraday trader would have a bearish view.

Based on what had occurred at this point, the swing trader would never consider buying stock with a chart like this the next day regardless of what it did at the open. However, the intraday trader having an understanding of gaps, multiple time frames, as well as how bearish traders have become trapped would be willing to buy the stock in the short term under the right conditions. Let's look at what it did at the open and did happen.

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Rather than move lower at the open, the stock gapped up a small amount, rallied, and closed above prior resistance and the daily TTs. To the intraday trader, this is a clear breakout with a tradable void above. It's a great long setup for that trader! The next step for the intraday trader is to find an entry, which could be a Pristine buy setup (PBS) a Pristine breakout (PBO) or any bullish pattern confirming the bullish breakout and signal of higher prices that should come.

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A textbook PBS formed at the 10 o'clock reversal period signaling that buyers did in fact step up on the pullback and prices were ready to move higher. While we cannot know for sure that prices would move as high as they did, there was the tradable void, so there was nothing to stop that from happening. Once the gap was filled, the odds increased that the stock would retrace then.

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Above is the completed daily chart of Altera Corp. (ALTR) as of the close on Friday, February 1. It's still not attractive for a swing trade, and at this point it's not of any interest to an intraday trader either. It had a good day on Friday, but now the current pattern does not suggest good odds in either direction for either trader since the prior bearish daily price action has been neutralized and the gap filled.

By Greg Capra, President & CEO, Pristine Capital Holdings, Inc.

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