The price of Vale S.A. (VALE) has doubled in the space of a few days this year. If you are a short-term swing trader you are probably very happy with this performance. However, investors with more vision will probably want to see the development of a large, proper-looking base pattern rather than chasing short-term moves in an overbought market.
This short-term chart of VALE, above, is a Japanese candlestick chart. This kind of chart needs four pieces of information to draw one candle chart: the high each day (or week), the low, the open and the close. For the Japanese chartist, the key of the chart is the relationship between the open and the close. Traditionally, if the security closes above the open, the "real body" of the candle is empty. If the security closes lower than the open, the candle was black.
Today, with the power of software, the real bodies' can be any color. One of the strengths of this charting technique is that reversals are quick, happening in one, two or three sessions. In this candle chart of VALE we can see that the recent real bodies on VALE were small or narrow, which tells us that there was a balance between bulls and bears. This candle pattern is called a spinning top, where the relatively small real body represents a balance between bulls and bears.
This longer-term chart, above, of VALE shows the long three-year slide. The recent rally for VALE has lifted prices to test the 40-week moving average. Stocks are edging into what people consider an overbought zone, according to the stochastic indicator in the first panel. The momentum study and the Moving Average Convergence/Divergence oscillator are giving positive readings in the lower panels. Traders with some patience looking to go long VALE could wait for the $4 to $3.50 area to be retested.