Red Hot Trend Trading Chart Pattern
One of the most bullish, yet underutilized, chart patterns continues to be the bullish inverted J. Sometimes this is referred to as a bullish inverted ascending scallop as well.
We are seeing this bullish chart pattern A LOT this year and it continues to perform well in most cases. HA and X are two monster inverted J trades for us this year on stocks with rapidly improving fundamentals.
Both made moves of greater than 50% out of this pattern. And these are not penny stocks where you question if the business is for real.
But we have been mentioning an even larger pattern recently in our newsletter that is one of the best setups this year. So far its made a move of about 20% higher from where we featured it 3 weeks ago with a lot of upside potential left after this latest pullback.
I am about to share with you this tremendous opportunity in the gold market but first lets talk about the bullish inverted J pattern and why its so powerful.
You can think of the bullish inverted J pattern as an inverted J Hook or rounding top pattern gone bad for the shorts.
So as a rounding top pattern starts to turn over it generally starts to attract short sellers as it makes lower highs and lower lows on the right side of the base. But what fools some short sellers is that the strong initial move higher is often just the first wave up.
As the price rounds to the downside it sometimes suddenly makes a higher low. And this is the key event in the pattern. Because if the price makes a higher high from there you have a confirmed trend change to the upside. (One day with a lower low is not that significant but 2 consecutive lower lows defines a new short-term downtrend for us.)
This is probably the single most important concept to understand in technical analysis – aside from horizontal and moving average support and resistance. This highly important tenant is that a higher low is the first trend change signal to the upside. And a lower high is the key trend change signal to the downside.
The higher low is often cited as the ideal entry point in the bullish inverted J pattern. Although we like to wait for the higher high on the right-side of the base as this often acts as strong support which can set up a terrific risk/reward ratio if you want to play with a tight stop-loss.
Lets go over the chart and I will explain why this was such a good trading setup and what we can learn from it. And how we can continue to make money off this stock.
Here’s the daily chart from when it was featured in our Weekly Alert:
Notice the well-formed rounding shape of the pattern. As the price starts to round over, short sellers start to place stops just above the preceding highs – playing the rounding top pattern. This sets up a strong move back through those highs at a later date on small catalysts because the shorts need to buy to cover their short positions.
Now we did not feature the pattern until after the first entry point was reached. The initial entry point was the higher low being made on the right-side of the base. However, as is often the case, this would have required a wider stop-loss as the price was still regaining its footing in a new short-term uptrend.
The best entry point in our opinion is a move above the prior high after the higher low. With this entry you can play with a tight stop-loss just a few percent below the prior high – around $13.80 in this case. This would have worked out well. A wider stop would be below the prior low.
Here are the factors that make this a great trading setup.
First of all, we have a strong uptrend in the stock and the gold market in general. Secondly, the stock had some of the highest estimate revisions according to Zacks.
Third of all, it was a very large and well-formed chart pattern. Money talks and technical analysis will tell you more than talking heads on TV. You can listen to opinion but where is the big money going? Technical analysis will answer this question more than anything else.
That being said, we prefer very bullish technical patterns with some real results and improvement to back it up. The large estimate increases and a strong trend in gold prices, lowering bond yields world-wide, are some of the fundamental factors that support this trading setup. Its not just a pump and dump penny stock in other words.
This pattern is enormous. In fact, some technicians would place a target close to $30 or more on this.
Here is the most recent chart:
So far, the stock has moved nicely higher. Its a good idea to take some off after a 5% to 10% move higher. But we would leave the majority of our position on and stop it just below the ideal entry point – just below $16.63 in this case. Or just below a prior low in the trend.
If you are a day trader you could look for a pullback to the 9 EMA, center of the bollinger band, or 20 day moving average. And then find a bullish candlestick pattern near there. Enter a trade with about a 3% stop-loss and then have a very good shot at a move of 10% or more within a few days.
One of the big secrets to day trading is finding a great swing trading setup. And then look for good day trading patterns after the price reaches the ideal entry point in the day trading setup. Or just before then as it nears the breakout point of the longer-term swing trading pattern.
This video has another great example of this chart pattern and some valuable tips to make money off of it.