Day Trader column for July 17 – 2012

The week before last week the market was looking up with a weekly pivot point to the upside, but that was all blown away last week when a weekly pivot point to the downside formed. The All Ords finished the week very close to 4,100 where it has been trading around for the past two months. Although some individual stocks were showing promise early last week my reticence to jump in was vindicated by last week’s market reversal.

I will say it again I do not like trading against the trend and as yet, by my criteria the trend has not changed to the upside. I am also not comfortable taking short term trades while the market is trading sideways like it has been for the past two months. A break below the 4,000 level could be quick and severe, in which case it would likely take most stocks with it.

Once again, back to the waiting game to see how the current sideways action is resolved.

Before I get to the third step to “Follow the Money” there is another support/resistance level to be aware of, which will invariably cause the price to hesitate and either consolidate or reverse direction. This level is price. For stocks priced below 20 cents these price levels will be 5 cents, 10 cents, 15 cents and then 20 cents. For prices between 20 cents and one dollar watch for resistance at each 10 cent level and 50 cents in particular.

Most stocks will then have difficulty at the round dollar mark. After $1.00 each subsequent dollar up to ten dollars will be resistance levels to watch.

After ten dollars look for resistance every ten dollars from there.

The above will become clear after studying some charts. There must be some ingrained psychological brake we apply every time we see a round number come up. You may well remember the pain we all felt when petrol first started selling for $1.00.

Now for the Third step in the process - targets. Targets like all charting techniques can be found in whatever time frame, from minutes to weeks.

There are several methods to determine possible targets and often two or three methods will come up with the same target which adds more credibility to the target price.

I find using projections from patterns or mirroring to be the simplest and quickest method to determine a likely target when scanning charts for prospective trades.

This method involves looking at the most recent price pattern and visually estimating the price difference between the spike high at the beginning of the pattern and the lowest low after the initial pattern spike high. This price difference when projected above the initial pattern spike high is the target level. The beauty of this visual method is that with a little practice it can be estimated very quickly as stock charts are scanned each week.

Additional targets can then be estimated by looking at each previous spike high and the pattern formed after that high, then mirroring, or visualising the pattern turned upside down on top of the pattern as if seen in a mirror. If you doubt this method works, it’s just a matter of studying some charts, either daily or weekly and observing how these projections have played out in the past.

Next week we will look at several other methods to estimate targets and how they often confirm the price target.

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Portfolio Position

Cash $290,667

Shares Nil

Total $290,667

Starting capital $50,000 in July 2006