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Daytrading’s Most Powerful Pattern

04/09/2012 8:00 am EST


Harry Boxer

Author, The Technical Trader

No signal is more bullish for a stock than what Harry Boxer calls the "price/volume surge." Here, he explains what to look for and how to execute once the signal is identified.

I’m with Harry Boxer and we’re talking about one of his favorite patterns to watch for. So Harry, talk about the ultimate pattern that you like to watch for in the market?

Well, what I look for is something I coined the “price/volume surge,” and I’m looking for stocks that are either quiet, or inactive, or forming a base for a long period of time, and then suddenly erupt on strong volume.

Volume is key; I don’t care about price moving. If I see price move with low volume, I’m very skeptical, and I usually don’t trade it, but when I see a major change in direction accompanied by volume, it’s usually an indicator money is flowing into a stock for whatever reason.

Usually you’ll find out that fundamental reason later on, and my actual favorite pattern is following that price/volume surge. The first pullback or the first consolidation that sets up on low volume—it looks like a pennant, a flag, a wedge, or a coil—that pattern is very highly reliable in terms of follow through and trend direction.

Now do you have objective measures that you want to see ten times the volume, or 100 times the volume? What do you like to see?

At least five to ten times the normal volume.

OK, and how about that base forming? Was that days or weeks in advance?

Usually I want at least weeks and hopefully months, and if it’s years, that’s okay. They say the bigger the base, the bigger the move.

I’ve seen stocks that went nowhere for five years and then exploded and went up 5000%, so when there’s a sudden change in direction accompanied by fundamental news, look out.

Let’s face it, most stocks are driven by fundamentals, but the technicals are the timing. If you can time a stock and catch it at the right time using the price/volume surge, you can make an awful lot of money.

So when you see those kinds of patterns, if it gaps up for instance, do you still have time to find a good entry for that even though the move may already have been made?

I say that the initial move is only the initial move. It’s the trendsetter, or the thrust that sets off the trend, and that could last months, weeks, years, a long time.

But on intraday trading, it’s the same kind of thing. When you’re looking at the trend of the last couple, three, four days forming a wedge, and suddenly, a gap out of the wedge on big volume, that could indicate that it’s going to be a big stock that day.

Alright, and if you’ve got a base that’s been happening for awhile, then where do you decide where that out point is where you’ve made enough money and you’re out?

That’s a good point. Well, you never have to get out of a stock if it doesn’t break support. So if stock gaps up, pulls back, and then runs again, the bottom of that pattern is your first support, and the top of the pattern is also a support level.

If it gets down to the top and doesn’t break that and trends up again, then you have a channel beginning, so you have a channel, moving averages, support lines, all of which are support. When those lines are broken, that’s when you get.

I know people who have been in stocks for months and years because it continues to trend and never breaks that channel. So why not stay in a stock and milk the trend?

When I trade stocks, I trade core positions, but also, if I have a 10,000-share position, I’ll trade out 5,000 shares when I hit my objective, and I’ll keep 5,000. Then I’ll let the trend take me higher, if the stock warrants it.

Because if you’re going to cut your losses quickly, you’ve got to make sure you take advantage of those moves fully, right?

Right, because you know, you can take ten small losses in a row, and it only takes that one big winner to make up for all of that and then some.

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