Rather than look at a single stock this morning, I'm going to look at a single pattern and likely one you haven't seen in the past. This pattern focuses on the parabolic stop and reverse (PSAR) indicator, which centers on trend following and reversal points.
As a stand-alone indicator, PSAR can be very good or very frustrating. There are periods of time when the indicator seems to catch every move, and other times where it just whips you back and forth producing small loss after small loss. By adjusting the settings, you can make the indicator very sensitive to short-term moves. With the PSAR, you have the step (first number) and the maximum step (second number) and you can adjust the sensitivity by altering either number. For instance, if you increase the step you have a less sensitive PSAR. If you lower the maximum step, you will have less sensitivity. The greater the sensitivity, the more chance you have in getting caught in whipsaws. The lesser the sensitivity, the greater the chance of missing a reversal at an optimum point.
Rather than risk one or the other, I developed a pattern that tries to draw from the strengths of both while using those strengths to offset the weakness of the other. In simpler terms, I have inputted both a less sensitive and a more sensitive PSAR on the chart at the same time. In this case, I have one with a large step and low maximum step paired with one holding a small step and a large maximum step. I am then looking for a crossover, of sorts, that I call a Falling Escalator (the name is a work in progress).
The concept here is to watch for both PSARs to initially be bearish. Next, I want to see one of the PSARs cross over bullish while the other remains bearish. Then, the next day, I want to see the other bearish PSAR cross over bullish while the initial PSAR remains bullish. When that happens, which you'll see on all these charts, you get a candle that is enclosed by two different PSARs on each side.
Let's take a look at Bitauto Holdings (BITA) to get an idea about what we are looking for. BITA has two such instances of this Falling Escalator, with one happening back in mid-October and the other taking place Tuesday-Wednesday of this week. Just looking at this week's action, notice how the green line PSAR crossed bullish two days ago while the red line PSAR crossed bullish just yesterday. This is what I am looking for as a potential buy signal. When this happened in October, BITA ran from $69 up to $92.
While this could be enough, and does backtest well, I still prefer to see some other buy indicators. For instance on BITA, the 13-period relative strength index (RSI) is crossing above the midline and recently just had a shorter-term bullish crossover in the slow stochastics. This price pattern helps us with a stop as well. If BITA closes under $50, then it would be time to walk away. This is one where I think I would wait for a close over $55, as well, before buying. That's the beauty, you don't have to buy right away if there is a price pattern, but it gives me more confidence in buying the price pattern breakout.
A few other charts where you can see this pattern are Vale (VALE), Eastman Chemical (EMN), MasterCard (MA), and ServiceNow (NOW), with many of the same setups. The additional charts are a help here as it demonstrates this pattern can appear in multiple sectors and in stocks with very different price patterns all at the same time. It adds versatility into the trading mix.
