A Bullish 'Bonanza' May Await

 | May 08, 2013 | 9:30 AM EDT  | Comments
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Stock quotes in this article:

bcei

,

hog

When I'm hunting for a sign that an overall trend is about to resume, something I watch for is a break in symmetry -- that is, similarity or equality when comparing market swings in the same direction.

As an example, in the below chart of Harley-Davidson (HOG), I have illustrated the symmetry between two corrective declines -- the swing between the Sept. 14, 2012 high and the Oct. 3, 2012 low, and the decline between the March 15, 2013 high and the April 5, 2013 low. These pullbacks came to a $5.96 and $5.76, respectively -- very similar moves.

Harley-Davidson (HOG) -- Daily (Price Symmetry)
Source: Dynamic Trader

When I ran what I call a "symmetry projection" (or "measured move") of that the more recent slide, it identified the $49.55 area as possible support area. I also ran the other Fibonacci price relationships I typically use, which revealed that two other price relationships overlapped that projection -- thus further solidifying the $49.44-to-$49.81 area as a Fibonacci price cluster of support.

When the stock made its low, it came in at $49.75, which sits directly within this zone.

Harley-Davidson (HOG) -- Daily (Time Symmetry)
Source: Dynamic Trader

Not only did we see this beautiful symmetry the price declines, but check out chart above, which illustrates time-based symmetry as well. In other words, the declines lasted for very similar periods -- 13 trading days for the earlier decline, and 14 sessions for the retreat to the April 5 low.

You can't make this stuff up. There are simply times when the market clearly defines an important inflection point or decision -- and, in Tuesday's session, Harley-Davidson met a major target off this last swing, with the next upside target between $58.80 and $59.07.

Now that we're clear on the concept of "symmetry," let's look at how the strategy is helping me set up a trade in Bonanza Creek Energy (BCEI).

When symmetry remains intact, we know the trend tends to remains intact, as well. So we should also know that, when symmetry is violated, it conversely suggests a possible trend reversal. For instance, in this past chart of Bonanza Creek, we can see where the symmetry of a prior swing down -- around June 2012 -- had been violated. That move was followed by an upward reversal.

Bonanza Creek Energy (BCEI) -- Daily (2012)
Source: Dynamic Trader

Well, we are currently looking at a similar reversal pattern in Bonanza Creek. The stock recently cleared the symmetry projections of the decline from the March 18 high to the April 15 low, as illustrated by the red lines labeled "100% APP."

Bonanza Creek Energy (BCEI) -- Daily (2013)
Source: Dynamic Trader

Since this indicates a bullish reversal, along with a new pattern of higher highs and lows since April 15 low, I want to buy the pullback to the stock's most recent low. The general area I'm interested in is $34.12 to $35.11, and the maximum risk can be defined below the April 15 low. As for potential upside, target 1 comes in at $45.16, with target 2 at $48.73.

Of course, if the stock takes out the April 15 low instead, I will back off the buy side until further notice.

Columnist Conversations

Well this is confusing...our models were calling for a run to 2072 before a bearish reversal would be possible...

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