Base Breakout Surge Stall
12.06 pm The index is up a couple of points after a softening in rhetoric surrounding US China trade talks took the wind out of a 30 point drop in the SPI. My positions are ok though MIN has pulled back towards 1900 support. Small caps are a little my way and I've added a couple of new positions though I think I've gone early, I could have got better entries.
I've been thinking about my attempts to move to longer term signals using weekly charts. I found it costly last week and felt that my hands were tied and yet I can see that there are good reasons to use the bigger picture to filter out day to day noise. It occurred to me that while I might use weekly charts to winnow down the number of stocks I'm interested in, I should still be using daily charts for entries and exits.
With that in mind, I got to thinking about the anatomy of a swing and came up with four core stages.
Base - for a long position the stock should be trending nicely and forming a base after a retracement or consolidation. The chart might give me an entry where the stock moves up to imply a higher low without confirming that by pushing through resistance.
Breakout - the stock moves clearly higher through short term resistance on decent volume.
Surge - ideally the stock then follows this up with a day or three of strong rallies. Quite often there'll be a pause after the first break which can give a low risk entry if I've missed the breakout day but can also test patience.
Stall - the momentum fades and though the stock may still be edging higher, it's time to get out. Sometimes I'll miss a second kick but generally I'm avoiding the retracement of this swing.
Using Mineral Resources as an example, the weekly chart is the filter and it shows a stock which trended strongly higher in the second half of last year before having a pretty standard correction of that move bottoming out at the start of April. It has then resumed the rally bouncing sharply above 2000 before going sideways to down for the last two weekly bars but with the closing prices for the last three weeks being 1967, 1940 and 1955 implying that there's no real strength in the sell off.
Moving to the daily, there's a good example of the structure I'm trying to identify at the start of the last swing higher. In this case, it was a simple correction of the prior leg up where the stock closed at 1800 on April 30th. In hindsight this looks like an excellent Base type entry but the risk is always that the correction is more complex, a standard abc or a slow overlapping abcde. In this case it was probably worth taking because of the tight nature of the pattern forming a sort of cup which I find to have a good risk reward ratio. As it happens I took the long the following day which was a Breakout signal with the stock finishing at 1844. Fortunately for me, there was no pause but instead the stock went straight into Surge mode as the next day saw a closing price of 1980 for a move of more than 7%. I sold that day but I realise through looking at enough of these set ups that I'm better to sell on the Stall day. It's extremely subjective whether the following day could be called stalling or was simply an extension of the surge but I think that when a large cap stock moves 15% in 4 trading days it's probably time to get out. Had I done so, there was another 3% although I think that realistically it would be wise to exit judiciously through the day.
Moving to my current long position in MIN, I bought last Wednesday at 1944 on a Base type entry as I was punting on a completed abc correction and a resumption of the rally. It looked good on Thursday as the stock finished at 2000 and ideally it would have followed with a breakout day, a surge etc. Instead the stock has pulled back to 1921. If it holds and rallies I'd hope for a reasonably prompt move to 2100 or higher. However, the risk now is that this will be a more complex abcde correction. What I mean is that there will be 5 overlapping waves of correction which can be quite shallow but squeeze out weak longs before a sharp resumption of the rally. If that happens, the stock might sell down to 1850-1870. I'm confident that there is more share price appreciation to come so I want to be patient but I'd certainly be happy if the stock held.
There's a good example of a 5 wave overlapping correction in BHP on the weekly chart. The stock fell sharply at first in 3 waves but then spent a few more weeks forming a minor new low just above 2800 support. Once it finally resumed the rally it moved rapidly beyond the previous highs near 3200 and that's often the case once this pattern completes.
2.07 pm In the small caps, I've added a new long in Kogan at 918. It's up to 925 but the main thing I'm trying to do is get in early on a base. My punt is that this is a flat 4th wave correction in the swing that started a few weeks back and the last part - the 5th wave - could be a quick move to a new high above 1000. So, if I get it right there might be a one day breakout and surge and maybe a second or third day to push it through 1000.
4.18 pm The ASX 200 index lost 3 points on a day when the large resources were sold down and banks and builders were weak too. Not so bad. I really like the lithium stocks at the moment and hold Kidman and Pilbara plus a small amount of Galaxy Resources. MIN closed down 28 at 1927 and I may have to sit out a further correction. MIN is diversified and sometimes trades like a lithium stock and at others like an iron ore play. Today it was sold down with the iron ore sector which is why I'm not convinced I'll get my breakout this week since FMG was down 3% and its ore is low grade like MIN's.
The small caps were more fun and although they weren't hugely profitable, I think there are some positions which will come good quite soon. For example, I bought TAW at 45 on a Base type entry and it has spent two days consolidating. It needs to trade above 47.5 to breakout and if it did it could easily get to the low or mid 50s which is quite a lot in percentage terms.
I've been thinking about my attempts to move to longer term signals using weekly charts. I found it costly last week and felt that my hands were tied and yet I can see that there are good reasons to use the bigger picture to filter out day to day noise. It occurred to me that while I might use weekly charts to winnow down the number of stocks I'm interested in, I should still be using daily charts for entries and exits.
With that in mind, I got to thinking about the anatomy of a swing and came up with four core stages.
Base - for a long position the stock should be trending nicely and forming a base after a retracement or consolidation. The chart might give me an entry where the stock moves up to imply a higher low without confirming that by pushing through resistance.
Breakout - the stock moves clearly higher through short term resistance on decent volume.
Surge - ideally the stock then follows this up with a day or three of strong rallies. Quite often there'll be a pause after the first break which can give a low risk entry if I've missed the breakout day but can also test patience.
Stall - the momentum fades and though the stock may still be edging higher, it's time to get out. Sometimes I'll miss a second kick but generally I'm avoiding the retracement of this swing.
Using Mineral Resources as an example, the weekly chart is the filter and it shows a stock which trended strongly higher in the second half of last year before having a pretty standard correction of that move bottoming out at the start of April. It has then resumed the rally bouncing sharply above 2000 before going sideways to down for the last two weekly bars but with the closing prices for the last three weeks being 1967, 1940 and 1955 implying that there's no real strength in the sell off.
There's a good example of a 5 wave overlapping correction in BHP on the weekly chart. The stock fell sharply at first in 3 waves but then spent a few more weeks forming a minor new low just above 2800 support. Once it finally resumed the rally it moved rapidly beyond the previous highs near 3200 and that's often the case once this pattern completes.
2.07 pm In the small caps, I've added a new long in Kogan at 918. It's up to 925 but the main thing I'm trying to do is get in early on a base. My punt is that this is a flat 4th wave correction in the swing that started a few weeks back and the last part - the 5th wave - could be a quick move to a new high above 1000. So, if I get it right there might be a one day breakout and surge and maybe a second or third day to push it through 1000.
4.18 pm The ASX 200 index lost 3 points on a day when the large resources were sold down and banks and builders were weak too. Not so bad. I really like the lithium stocks at the moment and hold Kidman and Pilbara plus a small amount of Galaxy Resources. MIN closed down 28 at 1927 and I may have to sit out a further correction. MIN is diversified and sometimes trades like a lithium stock and at others like an iron ore play. Today it was sold down with the iron ore sector which is why I'm not convinced I'll get my breakout this week since FMG was down 3% and its ore is low grade like MIN's.
The small caps were more fun and although they weren't hugely profitable, I think there are some positions which will come good quite soon. For example, I bought TAW at 45 on a Base type entry and it has spent two days consolidating. It needs to trade above 47.5 to breakout and if it did it could easily get to the low or mid 50s which is quite a lot in percentage terms.
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