MetaStock SPRS Series - Week 1 - February 1, 2011
By: Martha Stokes C.M.T.

Hi Everyone,

I am starting a series of training for MetaStock Users and for those who are just starting to learn about trading using MetaStock Charting Software. These weekly lessons are the foundation of Spatial Pattern Recognition Skills aka SPRS. These skills are critical for your consistent success as a retail trader in today’s fast paced, institution dominated marketplace.

We are going to study Stericycle Inc., SRCL (NASDAQ) Optionable under the Materials and Construction Industry, sector Waste Management. Currently about 95% of the outstanding shares are held by institutions. This is an extreme level for this indicator.


Chart 1

Above, or chart 1, is the daily chart using MetaStock Software and the TechniTrader® volume and TTQA indicators which help track institutional activity. What we are looking at is the change of pattern in the platforms this stock has been building. First, the candles themselves have become less consistent with more wicks and tails and smaller candles as the stock moved into the $80 range. The gap down is a breakaway gap to the downside indicating a weakness in the sideways action. This kind of gap seldom fills and is an early warning that the stock is at risk for more downside price action with rising downside energy. The questions then become:

1. How far can it move down?
2. Is this a good sell short candidate?
3. What trading style should be used?

Let's study the chart further.


Chart 2

Notice how red volume, or downside volume has increased in recent days and how TTQA is showing weakness as the stock moves sideways.

With red volume above the EMA and TTQA fading, this warns early that this sideways action is biased to the downside. The next strong support level is shown with the green line on top of the platform (sideways) price that form in the last quarter of 2010.

This gives you the run gain potential to the downside to use to determine the risk to profit ratio. By using the risk to profit ratio, you can determine if this stock has sufficient run gain potential to make a good sell short trade or an options buy put trade.

Now let’s look at the weekly chart to determine if the stock is simply having a short term correction phase, or if this could potentially turn into a longer term correction that would last several months.

Below is the weekly chart and we can see that this stock recently moved up out of an intermediate term bowl shaped bottom formation. The amount of downside potential is limited to the support highs created as the stock moved out of the bottom. Therefor this is a brief short term profit taking period for the stock and it is unlikely that the stock would reverse its overall long term trend.


Chart 3

The clutter of price action sideways that created the bowl shaped bottom is likely to create plenty of support aka: bounces, price moving up briefly, that could cause small losses if you attempt to sell short into this support area.

For now, SRCL is a short term prospect with limited downside point potential.The long term trend is up and likely to hold up unless the overall market collapses.

Answers to the 3 questions posed early in this lesson:

1. It can move down about 4-5 points before support will kick in and create a bounce up.
2. Yes, if the market overall is in a downside move and if an entry signal forms and the 5 essential indicators confirm more downside action. It must break down below the lows of January which is a mild support level.
3. Swing style. Possibly intraday for one day should momentum build on the downside.

Summary: SRCL has limited downside potential for a quick sell short but also has mild support within a point or two at this time. This is an overextended pattern rather than a full topping action to reverse trend.

If you would like to request a specific stock for SPRS analysis, write info@technitrader.com, state that you are using MetaStock Software, and the symbol and name for the stock you wish to have featured in this weekly discussion. Requests are on a first in first analyzed basis.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner

http://technitrader.com

(c)2011 Decisions Unlimited, Inc.

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