An Upswing Could Be Imminent

 | May 19, 2013 | 6:00 PM EDT  | Comments
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Stock quotes in this article:

slca

,

nflx

As you've probably heard, and as my own experience tells me, patterns tend to repeat themselves in technical analysis. If we see a pattern that's similar to one from the past, therefore, it may help us predict what might unfold.

For an example of this, let's start by looking at a pattern that I have seen quite often. It's what I call a break in "symmetry" -- that is, similarity or equality of price or time when comparing swings in the same direction.

In the examples I discuss here, we'll be comparing price swings.

Netflix (NFLX) -- 60-Minute
Source: Dynamic Trader

Within the Netflix (NFLX) decline from the April 24 high to the May 6 low, the shorter-term climbs came to $10.30, $7.74 and $5.59. I have marked the bounces in blue in the chart above.

When the stock finally saw more substantial rally vs. the largest of these swings (blue arrow), it constituted what I consider a break in the symmetry of the larger decline -- and it was an indication that we should at least see a deeper upside correction. It also suggested that we might be observing a change in trend. As you can see, Netflix ended up reversing the downtrend into that recent low.

Now let's look at a similar pattern in U.S. Silica (SLCA).

U.S. Silica (SLCA) -- Daily
Source: Dynamic Trader

On the chart above, I've actually highlighted where this pattern has failed once before. As you can see, the first break of symmetry was followed by a failure, rather than a deeper upside correction or a change in trend. So this pattern is not 100% -- that's life.

Still, if you study this stock, you will find that it is certainly worth watching, with another break in symmetry within the most recent decline. I am seeing a key price-support cluster at that last low, and I am once again willing to watch this pattern in order to watch for a possible upside reversal.

If that April 30 low ends up holding -- thus proving it to have been an important level -- the initial upside target in this stock will come in around $31.32. Target 2 will come in at $34.91. The strategy is to look at pullbacks that terminate somewhere above the April 30 low, which are then followed up with a buy trigger after the pullback. The maximum risk is defined below the April 30 low.

For more information about trades and triggers, please refer here.

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