Reversal Patterns

Reversal Patterns

Today I have an excellent chart from WPG. WP Glimcher Inc. is an apartment leasing company. They were split off from Simon Property in May of 2014

blog wpg 2015

 

This single chart shows many of the things I’m looking for in a turnaround stock.

We will start with the parallel channel that runs from the left side of the chart to center right bottom (blue lines). In the middle of that I drew another line so I could track the accelerated fall in pricing.

  1. The last two bars in the fall are larger which indicates panic among those who are not familiar with the fundamentals of WPG or it is just becoming too painful to stay in this stock. This is very often much more pronounced than we see here. The larger the bar the bigger the panic. What’s happening are the strong hands (the folks who make money in the market) are buying from those who folks who lose money in the market.

 2 Never go long a stock when it is high and never go short when it is low. The stock may go higher or lower but your risk is too high. If you’re going to buy a stock or anything else, buy at wholesale. If you’re selling, sell at retail. Don’t forget that going short is selling short.

3 Risk is defined as how much money you can I lose before I abandon this position. We all have a limit were we just can’t take the pain anymore. For most people that means setting stops that you will not let your position exceed. Then you at least know what you may lose on this trade.

Since I have been trading for almost two decades now I use a little more of a sophisticated strategy.  I first bought WPG back in May at 14.44 where I thought it was severely oversold. It bounced to 14.95 and started to drop. I sold half the position for a quarter and most of the rest for a dime. I kept a few hundred shares. If I had been playing this stunt with a 100 dollar stock it would have been a hundred shares or less to hold because the risk is so much higher. As it was I was down 400 bucks before I added several thousand shares to this trade.

The red candlesticks (bars) are negative days from the opening price of the day and the green candlesticks are positive from the open that day. The two lowest bars on WPG chart are called a tweezers bottom. I like them even more when they have long tails under the body of the candlesticks. As is evident in the chart they signaled a sharp reversal. Notice the large candlestick when the upper parallel line was broken. WPG topped out at 14.40 when Goldman announced they want to buy more WPG at a lower price.

 

23-Jun-15 07:22 ET WPG WP Glimcher initiated with a Neutral at Goldman; tgt $14  (14.13)

Courtesy of Briefing.com

It’s always nice to know the big boys are interested in your trade.

Let’s take a look at the blue circle area. Two days after the high of 14.40 Goldman gave WPG a neutral rating and a target of 14.00. That’s where it gapped down on 6/23/2015.

4 A double bottom or a higher low indicate a possible turn in the direction of the stock.  This a strong reversal signal and gets stronger and stronger the farther the stock has fallen, as long as the fundamentals are still intact.

WPG then moved back up to 14.29 and set the cup for a cup and handle reversal pattern.

5 A cup and handle is another strong reversal signal. On stocks that don’t do a sharp V reversal you will see this pattern often. The entry for this pattern is the breakout over 14.29, the high of the cup recovery.

 6 An ascending triangle breaks higher over 80 percent of the time.  The ascending triangle is the next pattern we see. The breakout for the triangle is 14.14, for the cup and handle 14.29 and for the higher high 14.40.

I’m looking at the valuation on WPG to be at least 10 times P/E of guidance of 1.77. So the target is 17.70. There is resistance at 17.08, 17.76 and 18.22. I will sell half at 17.00 and the rest at 17.50.

This is the plan of battle, but commanders will tell you the plan changes as soon as the first shot is fired. So be flexible, if the market starts running up hard and takes everything with hang in till it stops. Conversely set a hard stop and don’t let a stock run against you, especially if you have a nice profit.

WPG broke to the downside and set a lower low than the cup in the cup and handle. That pattern is now broken and worthless to us.

KORS, which I have been trading way to long, finally set a cup and handle which I bought at the breakout.

blog kors 60 min 7-31-2015 On a stock that has taken the beating KORS has, this is a typical breakout from a cup and handle. Notice that on the morning of the 27th KORS set a high of  39.77, then fell away for the day. On the 28th it set a lower high at 39.61. That was the top of the cup and handle because it then set a higher low. Yes, a higher low is a big deal because it tells you the bears (sellers) couldn’t take it to a new low.  If they are no longer in control the stock will go higher. Notice that there are three higher lows before KORS broke through 39.61. I don’t buy this pattern until the break over the top of the cup.

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