Extreme Reversals

• August 8, 2000
• Eddie Kwong

Today we saw the fourth day of positive
follow-through off August 3, 2000’s reversal in Extreme Networks
(
EXTR |
Quote |
Chart |
News |
PowerRating). 

The setup is worth taking a look at, as it illustrates a useful one-day
reversal pattern that many short-term traders look for. 

For you Cooper afficionados. . .no, this is not a Gilligan setup in Extreme
Networks
(
EXTR |
Quote |
Chart |
News |
PowerRating), although it is quite similar This pattern does not meet the
criteria for a Gilligan because you would have needed the stock to pull back to
a two-month low.

But one of the things I’ve learned over the years is to not follow patterns
mechanically. Rather I look for the basic schematic of a pattern and then factor
in any unique considerations that may be embedded in the surrounding price
action. This way, I can loosen up on the pattern criteria a bit. EXTR merited
attention owing the following factors coming together:

• The stock gapped lower, but then recovered on a substantial expansion in
  the intraday range.
• The reversal was in sync with the main trend that had been in place for
  the past two months.
• Good volume came on the reversal day.
• The snapback occurred off EXTR’s 20-day moving average.

As you can see, it’s always best to have a full understanding of the
rationale behind a particular pattern. The better your understanding, the
more you can bend the rules.

Until tomorrow,

Eddie