This is a pattern that I discovered pouring through charts over the years and I found it quite reliable and can give a price target as well. I'm not sure if anybody has written about it or given it a name, there must be something written about it somewhere but probably i haven't stumbled upon it yet, so I just named it The Break Down Trendline At 20 MA Bullish Continuation Pattern.
It's a mouthful just to pronounce it but I think the name self describes what it is. The reason is obvious. The stock breaks a short term down trendline as it meets the rising 20 MA.
I have found that this pattern can produce quite a big gain in the stock price. It gives the trader a price target but since it follows the trend, the trader can often ride the stock higher for more gains. This is a trend following chart pattern.
In order for it to be a valid Break Down Trendline At 20 MA Bullish Continuation Pattern, the stock needs to satisfy these criterias:
The chart above shows how this pattern looks like. First of all, there was a previous bullish move in GILD. The stock then corrected towards the rising 20 MA. The correction was orderly and the decline was gradual. To the new trader, it might be difficult to spot. But to an experienced eye, the correction was very orderly.
The trader can then draw a down trendline connecting the highs of the correction. Notice how the down trendline and the 20 MA converge? The moment it converges and the stock breaks above the trendline, a valid pattern forms. See how nice GILD rallied from there.
This is a powerful pattern that can give a stock a nice short term move to the upside. It also gives the observant trader a nice swing trade to the upside.
It is important for the trader not to read every price decline into the 20 MA as a break downtrendline at 20 MA chart pattern. The keywords here are order, clean and confirmation. The correction must be orderly. The price pattern should be clean enough so that a downtrendline can be drawn. There must also be confirmation by price breaking above the down trendline.
In the chart above, ILMN had a correction in May. It almost formed this chart pattern. However, there was no confirmation as price did not break above the down trendline. There were 2 more corrections in June and July but the price pattern was sloppy and price dropped below the 20 MA and stayed below it for too long which indicated weakness rather than a bullish continuation.
Around early August, ILMN gapped up and then it started an orderly correction to the 20 MA. That is also where price support is because old highs once overcome now becomes an area of support. Traders can draw a down trendline and you can see how the down trendline meets the rising 20 MA and converge. The pattern became valid when price broke above the down trendline.
Once it broke out the stock kept on rising.
You can often find a target using this chart pattern. It is quite easy to get a target. All you need to do is to take the height of the previous upswing move and then project it from the point of breakout. The chart of MNST below clearly indicates how it could be done.
MNST had a nice run up from around 3rd July to the end of July. It then corrected to the 20 MA. The stock gap down and this caused some panic selling but it immediately traded back above the 20 MA. Compared to the previous example, this was not as clean as it should be.
However, this is where the judgment and flexibility of a good trader comes into play. First of all, there was a failed expectation of price falling. The gap down indeed scared off many people but the fact that price did not go down but quickly ran back up above the 20 MA surprised many people. When expectations of price decline fails, it now suddenly becomes bullish.
Secondly, the stock was correcting to an area of price congestion which acted as a very strong support for the stock. These combinations hinted to the observant trader that the gap down was just a temporary weakness.
To get a price target for the stock, the trader can take the height of the previous move and then project it upwards from the breakout point. You can see how MNST almost reach the target.
NCLH is another great example of how this pattern can help to set a realistic price target. NCLH had a nice rally upwards in mid June and then it corrected up to mid July. The stock then broke a down trendline. The measured move target was exactly at the top of the topping tail. Observant traders who knew this chart pattern well could have taken profits off the table or at least half of it.
A chart pattern can always be traded. Therefore, a trader who notices this pattern setting up in a stock can actually trade the breakout from the trendline. First of all, a valid chart pattern must be forming. The moment the stock breaks above the trendline, the trader can just buy the stock. He or she can put a stop loss at the low of the pivot point.
In the chart above, we can see how MCHP formed a nice break down trendline at 20 MA. The trader can draw a trendline and the moment the stock breaks above it, they can buy the stock and put a stop loss below it. Notice that the correction stopped at price support area and this is a good area to place a stop loss as well. In trading, the convergence of technical concepts will ensure greater accuracy in trading.
When this chart pattern forms, it often hints of a nice bullish continuation in a stock. It takes patience to find this chart pattern. Traders should be selective and not read too much into any stock that is correcting to its 20 MA. When the perfect pattern comes along, it can be a great bullish continuation trade.
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