Here's a new chart pattern that suggests when to take profits before a trend change begins. Included is a review of past performance.
I sn't it strange how an idea occurs? Being hit by a falling apple led Sir Isaac Newton to extrapolate that the apple was acted upon by the same force as that which allows the moon to orbit the Earth. Similarly, while I was doing research on price prediction, a thought came to me when I came across an illustration showing the measure of a head-and-shoulders formation. I wondered if there were a simple measuring technique to determine how far prices would fall once a trendline had been penetrated. In my quest to answer the question, I discovered a trendline formation that I call the bump-and-run reversal (BARR).
Before you can identify a bump-and-run reversal, you need to draw an upsloping trendline correctly. Rising trendlines connect the lows of a price series and represent an area of support. Suffice it to say that you locate the lowest low on the chart for the period being considered. From that point, draw a line to the highest minor low before the highest high without crossing any prices in between. The method is simple, repeatable and accurate.
Figure 1: A typical bump-and-run reversal. The formation begins by following a trendline upward until prices bump up and away from the trendline, reverse, then plunge below it. The bump started after earnings were announced. From the peak, the stock dropped by half in less than three months.
Once you're comfortable drawing upsloping trendlines, it's time to find a bump-and-run reversal. Figure 1 shows an example of a typical BARR in Allen Group [ALN]. I call it bump-and-run because of the characteristic bump at the formation's end followed by a downhill run.
The bump-and-run reversal is a new chart pattern that shows the change in momentum as a stock climbs the charts. The bump is noticeable, since it is far above the prices leading up to it.
CHARACTERISTICS AND PATTERNS
When I discovered the bump-and-run reversal formation, I studied its behavior. My preference in using it is to use daily price charts, but the formation is readily visible on weekly and even monthly stock charts. In searching through roughly two years of daily price data in scores of stocks, I located many complete bump-and-run reversals. There were several that were in the process of forming, and so were not counted.