Search for Specific, Predictable Chart Formations
So Qualcomm
[QCOM>QCOM] is up 156 points and I’m asked throughout the day:
“what, are the daytraders running this thing?” I don’t think so! Not on 15
million shares.
For the past two years I’ve heard and read a lot about
how daytraders have been moving stocks around day to day, specifically Internet
stocks. A year ago, I even remember hearing on a financial news radio station
ago how the average share execution on Internet stocks was only 500 shares, and
how that somehow suggested the trading was part of the mindless manipulation of
daytraders.
Number one, for the most part, daytraders are reactive
traders and attempt to ride the coattails of some proactive, larger buyer who
initiated a move in the stock. I can assure you, if a $150 stock is up 10 points
on the day, and closed near its high, it wasn’t Aunt Milly driving the price
higher in her online account. Moreover, being in the trenches and being involved
in many Internet stocks over the past two years, I know for a fact that, in many
cases, 500 shares may be all that’s available to buy of one of these puppies at
a certain price before market makers adjust the bid and ask higher. I’ve had
10,000-share orders filled at 20 different prices in some cases, within a tight
range of course, because there were only 500-1000 shares available at a
price.Â
It’s high time everyone stops blaming daytraders for missing
out on moves and to begin understanding market dynamics.
One of the ways
I do it is by studying simple supply and demand through the use of pattern
recognition. I search for specific, predictable chart formations and study how
daily volume (supply and demand) interacts with price to determine where
in-the-know institutional investors are accumulating positions.Â
In
the case of Qualcomm, I pointed out in my Dec. 19 column how this market leader
just broke out to new highs from what is called a “high, tight flag” formation
(see that column for further explanation). Although rare, leading stocks in the
past have rocketed higher and doubled off this pattern in the right market
environment. Since the recent breakout occurred at $400, that gives us a price
target of $800. Still remains to be seen, but QCOM appears on its
way.Â
Study this chart. Or better
yet, if you subscribe to Daily Graphs, or some other daily chart service, cut it
out and paste in a book as part of your ongoing study of the market. I’ve seen
this setup work before and it will work again in the future. But the only way to
ensure that you catch the next one is by studying one from the
past.
Wednesday’s move in Qualcomm does have rhyme and reason. The chart
suggested it 259 points ago.