All day I scan the charts looking for technical patterns to trade. My Trending 123 Pattern Scan powered by Recognia is one useful tool I have to scan the markets quickly, and it is showing two polar opposite technical events for these electronics stocks.
A bullish continuation wedge consists of two converging trend lines. The trend lines are slanted downward. The apex of this pattern is slanted downwards at an angle. This is because prices edge steadily lower in a converging pattern i.e. there are lower highs and lower lows. A bullish signal occurs when prices break above the upper trendline.
Over the weeks or months that this pattern forms the trend appears downward but the long-term range is still upward. Volume should diminish as the pattern forms. If volume remains the same or increases this signal is less reliable.
Recommendation: Buy NOK for a target of $4.90 – $5.20, with a $3.15 stop.
A double top occurs when prices form two distinct peaks on a chart. A double top is only complete, however, when prices decline below the lowest low – the “valley floor” – of the pattern.
The double top is a reversal pattern of an upward trend in a stock’s price. The double top marks an uptrend in the process of becoming a downtrend.
Sometimes called an “M” formation because of the pattern it creates on the chart, the double top is one of the most frequently seen and common of the patterns. Because they seem to be so easy to identify, the double top should be approached with caution. Many investors assume that, because the double top is such a common pattern, it is consistently reliable. This is not the case. The double top has a failure rate of 65%. If an investor waits for the breakout, however, the failure rate declines to 17%.
The double top is a pattern, therefore, that requires close study for correct identification.
Investors should ensure that the pattern is in fact comprised of two distinct tops and that they should appear near the same price level. Tops should have a significant amount of time between them -ranging from a few weeks to a year. Investors should not confuse a consolidation pattern with a double top. Finally, it is crucial to the completion of the reversal pattern that prices close below the confirmation point.
Recommendation: Short PANL for a $27.60 – $28.30 target, with a $37.05 stop.
InvestorPlace advisor John Lansing tracks the charts all day and offers expert technical analysis in his day trading, options and trading services: Power Trading at the Open, Parabolic Options and Trending123. For more information on which service is for you click here.