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Training Video_32

 

Trading Long with Technical Analysis

In this part I will show you a first example of trading based on technical analysis. We start with a long trade, how to make buy and sell decisions based on technical analysis techniques. I will apply the basic knowledge presented in the previous videos.

We will be looking at the chart of Avery Dennison Corporation. The date is February 13 2009. The first thing you do is, look at the long term trend with a weekly chart.

January 26 price reached a long term high, finishing a long term Elliot impulse wave up. We will use my Elliott wave count indicator to find a count that complies with the Elliott wave rules.

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Hallo, Sylvain Vervoort with technical analysis part 32. In this part I will show you a first example with a long trade, how to make buy and sell decisions based on technical analysis techniques. I will apply the basic knowledge presented in the previous videos. Pay a visit to my website at stocata dot org and buy my new book “Capturing Profit with Technical Analysis”, a complete technical analysis reference and a winning trading system.

We are looking at the chart of Avery Dennison Corporation and the date is February 13 2009. The first thing we do is, look at the long term trend with this weekly chart. January 26 price reached a long term high, finishing a long term Elliot impulse wave up. We use my Elliott wave count indicator to find a count that complies with the Elliott wave rules. Now it looks like we are close finishing a first correction wave [A] down. This wave is an impulse wave {1} to {5}, with an extension in the {5} wave with, the impulse wave (1) to (5). A Fibonacci projection from the start of this extension wave and the turning point at wave (1), gives a price target of $17. When this last wave (5) is completed, it also completes the waves {5} and the first big correction wave [A]. We expect after that an up move for the creation of the [B] correction wave. This is an ABC up correction. Let's have a look at the daily chart.

On the daily chart we can make a more detailed Elliott count. We are waiting for the completion of wave 5, (5), and {5} to complete the first big correction wave [A]. Let's switch to a more clearly short term view.

If we make a short term historical Fibonacci projection from the top of wave {4}, back to wave {3}, we get a confirmation for the $17 target proposed on the weekly chart. We can try to find out when this target could be reached.

The best estimate would be first week of March. The $17 price target from the weekly and daily Fibonacci target is crossed in that period by the median line of the Andrews pitchfork. Price is expected to move towards this median line. Also the last downtrend and inverse downtrend line point to the same period and they form  for now a wedge pattern, so there is a good chance for a break to the upper side later on. Let's watch for the next price move.

 

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Price reaches a low at $16.7 and makes an upturn now, breaking the downtrend line with the closing price. Note that price still did not touch the median line of the pitchfork. If price starts moving up now it should move above$33 to move above the start of the upper pitchfork line. If we are at the end of the long term downtrend, we can expect a bigger up move now. The candle chart is showing a morning star reversal with the last 3 candles. Setting a stop at $16.7, the low of this pattern and buying now March 10, 2009 at $18.4, keeps an eventual loss limited to 10%. It looks like it is a good time to buy!

Looking at the 14 periods RSI indicator, note how it is moving in the oversold zone with higher bottoms positively diverging compared to lower bottoms in price. One more confirmation for the buying decision.

We can now try to estimate where the next price target is. We cannot make a normal Fibonacci projection since we have not yet a turning point in the up move. But we can make a historical projection using a previous turning or resistance point. Most acceptable here seems to be a gap in the previous downtrend that will present resistance for the up move. This gives price targets at $24.5 and $29.5. When could the target of $29.5 be reached? A pitchfork can help us for this estimate. But we have a problem since we do not have a third reference point. So, we will have to find an acceptable angle. Thinking about action/reaction lines, we can use the angle of the previous uptrend line below wave 5 and B. That way we have a crossing between the Fibonacci target and the pitchfork median line around the end of April. A confirmation is given by the flat downtrend line from the tops C and 2. We expect price to move towards the pitchfork median line, so our best estimate for now is to reach $29.5 by the end of April.

Looking back a longer time period, note how a Fibonacci retracement from the start of the last big impulse wave down, will pose resistance at 38.2%, corresponding also to $29.5. And as you can see that was previous also a price support point a couple of times. So, also the past longer term move confirms the $29.5 target as a resistance level. Let's open the position at $18.4 with an initial stop set at $16.7.

Believe it or not, there was a nice up move to the $29.5 target and this price was reached April 24. Now, may 7, the uptrend line is broken. Note the bearish harami cross pattern at the top. The Elliott wave count is still a guess, but with any count, we would now expect a price reaction further downwards. The ATR trailing stop is not broken but I would usually not wait for that and only use it as a final MUST sell now. So, we close the position with a 50% profit at $27.2, waiting for the end of the reaction before entering a new long trade.

Price makes a triangle correction pattern and breaks out of the triangle formation and out of a downward pitchfork, where it did not touch the median line. The ATR trailing stop has not been broken. There is no good reason why we should not open a new long position here. Especially, because we can make use of a tight initial stop at the level of the low of the gap between the last two candles. We open a long trade at $28.2 with an initial stop at $27.2.

June 15 our initial stop is broken and we close the position at $27 with a loss of $1.2 or less than 5%. Let's wait for the next signal.

July 1, when the last top wave B was made, there was doubt to open a new long position. However since price stopped exactly at a previous resistance, we decided to wait one day before taking action. The next day there was a bigger move down. Now, July 15, we have a possible complete Elliott correction count and price breaks out of a down moving wedge with a gap. We want to profit from this opportunity, opening a new long position at $25.6 and an initial stop at the low of the gap at $24.7. A small loss if price would still continue the down move.

It was a nice up move. We are closing the position October 28 at $35.6, a nice $10 or more than 30% profit. End of July there was a big one day move, that broke the ATR(3,5) stop slightly. Since it was not confirmed the following day, we adapted the trailing stop with a 3.5 multiplication factor for the higher volatility in this up move. Now the accelerating trendline and the trailing stop is broken. Enough signals to sell.

Time for you to do some work! In a long term uptrend of CAM there were some months with a flat correction move. Now a new up move started with a lower degree impulse wave the second half of September, finishing a new wave (1) half of December. Next there was a correction for wave (2). This down move is now breaking the downward trend line. The new up turning point is at previous support and resistance, at 38.2% Fibonacci retracement of the complete wave (1) and at a reaction line. This may be a good moment to open a long trade to catch wave (3). Before opening a long trade, try to answer the following questions:

1. What is the value of your initial stop setting?
2. What is your target price?
3. When do you expect this target price to be reached?
4. Is the risk-to reward-ratio OK?
5. What will be your profit taking base?
   

You can find the solution at: stocata.org/youtube/solutions.html

This is the end of the part about a first example with a long trade, how to make buy and sell decisions based on technical analysis techniques. Next we will look at an example for a short trade. Tell your friends about these videos and while visiting my website order my new book “Capturing Profit with Technical Analysis”, a complete technical analysis reference and a winning trading system. See you in the next video!

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