I will be giving a MetaStock webinar on “Momentum Bottom Price Action” November 17th which is a Thursday. I look forward to you joining me once again. Since we are in a swing/momentum style market action right now, reviewing how to trade these kinds of runs is important.
The sentiment shifted back in early October to the upside which was the signal for traders to switch out of selling short and back to the buy side. We are seeing plenty of gaps: common, breakaway, running, and merger gaps. Be sure and know the difference as some fill and some gaps do not fill.
Everyone wants to be able to capture a gap profit. In order to do so, you must be in the stock PRIOR to the gap. This can be frustrating to many traders if they can’t identify the pre-gap price action that tells you at stock is likely to gap or run very fast our of a consolidation.
Today we are going to look at consolidations. If you use the TechniTrader® Explorations designed specifically for MetaStock Users, then you have already seen that the Consolidation Exploration has huge numbers right now. This tells us that the majority of stocks in the market are consolidating at the bottoming level.
Upside energy is sporadic and so a pre-gap or pre-run entry must be used to be in the stock at the time it gaps or runs suddenly.
HS HealthSpring moved out of a bottom with a “sandwich” candlestick pattern which is a squeeze pattern. The final low black candle is follow but a pole vault, then a smaller black forms inside the white followed buy an engulfing which that completes the upside sandwich signal. This is the first buy side signal. Note the shift of sentiment suddenly from selling to buying in both TTQA and TT volume bars.
Chart 1
There is a surge of quiet accumulation going on by dark pools and other very large funds buying under the radar of the HFTs, floor traders, and pro traders. That is what TTQA exposes. Green bars followed by a few gray bars, followed by another rise of green bars, followed by gray again then green again. This is a foot print of dark pools and quiet accumulation by the giant funds who tend to get news first, and are typically moving in or out ahead of an event.
These giant funds use a similar controlled bracketed order set on auto-pilot (similar to the order you are taught in the ME10 course) and the buying occurs automatically, incrementally as a certain price point is hit. This is what creates the obvious pattern of accumulation, or the footprint as I call it. The giant funds know something before the rest of the market knows it.
As a retail trader, tracking the giant funds, recognizing their footprint and getting in as they are, is how you catch the gaps and big runs.
Notice that the price range is very consistent highs and low and that recently there is a compression pattern. That compression is your cue that whatever is going to be announced is imminent. Now the wise funds wait for the event.
And it occurs quickly after the compression. You can see below that this is a merger. The gap is huge and price sits at the same level after the merger announcement. The gap is huge because the buyer of this company has offered that price for the shares of stock. This means that the new value for the stock is the offered price, hence the big gap. The company buying HS is paying a premium price for the shares of stock. On the day of the announcement of the merger is when swing traders exit the stock, take profits and smile a lot. The only way to enjoy your big smile is to recognize the set ups before a merger announcement. Students love this entry because it is obvious, easy to see, and the hold is brief.
Chart 2The Huge Volume Exhaustion? Is HFTs trying to grab pennies with thousands of in and out trades? You have the advantage, you get many points rather than just a few pennies. The huge TTQA surge confirms it is professionals trading on the news.
We are going to see many gaps like this in the next 12-18 months as merger fever rises. Corporations are sitting on huge sums of cash and they are buying up companies and merging because they have the money to do so before the economy starts expanding again.
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
http://technitrader.com
MetaStock Partner
©2011 Decisions Unlimited, Inc.
Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.
