The chart patterns below are great examples of each of these three patterns in motion, captured May 2000. Notice in each of the three TA lesson examples below we have a pair of charts: the 6-month "big picture" chart and the 10-day "swing trading" chart.
Notice in this 6-month chart that CSCO has:
1) always stayed above its 200MA (white) line,
2) has almost always stayed above its 100MA (orange) line.
What does this tell you? Overall, it's a strong stock, and that any weakness should be seen as a buy opportunity. It looks like 50-80 is the "wide range" for this stock, and that the 100MA at 63 should be considered a key support level. Use the MA lines to "map out" support and resistance for trading here.
We need more detailed information to trade it, though, so we look below at the 10-day chart:
10-day CSCO chart: What do we see here?
Sure enough, CSCO bounced off low 60's, once on 4/24 and again on 5/3.
This tells us that if we were to enter a swing trade here we should place our stop loss at right under decade resistance, or about 59 3/4 or so.
Our exit target should be right under the next MA line, the 100 MA, at about 70. So, the swing trade is:
A breakout play would be to buy once CSCO has crossed 70 1/2 or so, with a stop right under 70. Bottom bounce play: Enter/buy low 60's, stop loss right under 60, exit target 68-69.
Using MACD: notice where the lines cross at the bottom? First time/buy signal is towards the end of the day on 4/24, sell signals at the top on 4/26 and 5/1, buy signal on 5/3.
MA Lines: CMGI has "lost 200 MA support at 80, so major fund managers probably won't be buying til it's over 81.
Notice that unlike CSCO from above, the MA lines (especially the red 20MA) have crossed over, a bearish downtrend reversal pattern.
In general, avoid these types of stocks for position trades, the swing trades you enter must use a previous (eg recent or 52-week) low as a stop loss level.
One bullish signal, we have CONSOLIDATION (choppiness) around the 50-70 level on the chart, this can precede a trend reversal.
Pop Quiz: Where should your maximum stop loss be for CMGI based on this chart? Answer below.
Using the 20MA: Ok, see how the red 20MA closely follows the overall price trend? What do you see on the far right?
The 20 MA indicates resistance at about 64. The 10-day chart support level is on 4/24 at 50ish.
A bottom bounce play would be to buy as soon as the bearish trend reverses, above the most recent candle after seeing 3-6 down candles.
Notice that on 5/3 we have 3 down candles, where CMGI dropped to 58. It immediately rallied back up to 63.
This might be a good entry here, with a stop right under 60. A conservative strategy would be to "make" CMGI break above 70 before buying.
MACD lines indicated buy opportunities on 4/24 and 4/27, where the lines crossed.
Answer: Max CMGI stop is 50, conservative stop is 60.
Finally, we have SPLS, a classic "rolling stock". You can see the recent trend is down, and that 22 is hard resistance, at the 200MA.
The other MA lines are not useful for us in trading this stock based on the chart to the right. What else do you notice "big picture"?
When SPLS dropped to 17 in Nov 99 there was a huge upside reversal. This is an important example of the kind of "big picture" chart patterns you should be aware of.
The MACD told us we had a buy opportunity on 4/27 and 4/28, when the lines crossed to the upside.
Notice the heavy selling volume on 5/3.
Based on our 6-month chart, I would enter a long position at 17 1/4 and expect a bounce back to at least 18 1/4 within a few days.
Knowing a stocks' trading range and playing the channel is a fairly good way to swing trade. Make sure you're not channel playing a stock that's run up hugely in the last several months, those are "bubbles" that may burst, like the biotechs did in Jan-Feb 2000.
Your stop on this swing trade would be right under support at 16 3/4 or so.
These sets of chart patterns should help you identify similar high-percentage trading opportunities as they occur.
In swing trading, you must always look at both the "big picture" 6-month (or longer) chart as well as a closer 10-day chart.
Stops must be adhered to right under support levels, to insure against large downturns.
Plot similar graphs using bigcharts.com or your quote provider, and see where you should set alerts and make trading decisions.
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