Staying On Your Toes
If a stock on your watch list blows
out of a correction-recovery pattern without giving you a decent pivot, don’t
give up. Keep it on your radar. It might form a platform in new high ground
before staging a breakout above its prior base.
Nasdaq-traded ADRs in Grupo Financiaro Galicia SA
(
GGAL |
Quote |
Chart |
News |
PowerRating) blew out of a 5 1/2-month base on Jan. 9. The prior to the surge to
new high ground, the security etched an upward-wedging handle (underlined in
green in the following chart). Such a price structure is normally prone to
failure. Proper handles should drift downward on low volume, indicating that the
last weak holders are trickling out amid minimal profit-taking by the remaining
shareholders.
Instead,
the security surged still higher, then put in a tight, little consolidation area
(underlined in black in the chart) before forging still higher on six times its
usual trade. Patterns are sometimes in the eye of the beholder. You could call
it a cup with a high handle, a flag or a give-and-go. In a give-and-go, the
stock breaks out of a consolidation pattern on heavy volume and advances more
than 20% in a matter of days. Then it puts in a pause for two or three days and
takes off again. Whatever the pattern, this is a high-risk trade, occurring so
high above well-established support, but playable with a tight stop and
eagle-eyed surveillance.Â
The top field of all charts in this
commentary uses a logarithmic price scale and displays a 50-day price average in
red. In the second field, a
blue relative strength line represents the displayed security’s price
performance relative to the S&P 500. The third field displays vertical daily
volume bars in black.
All stocks, of course, are risky. In
any new trade, reduce your risk by limiting your position size and setting a
protective price stop where you will sell your new buy or cover your short in
case the market turns against you. For an introduction to combining price stops
with position sizing, see my lesson,
Risky Business. For further treatment of these and related topics,
check out the Money
Management area of TradingMarkets’ Stocks Education section.