SILC: Trick....or Treat?

Annie,

After the September 4 Breakaway Gap, the first target of 26.74, which was a return to the high of the Big Symmetrical Triangle (in black) got MADE very quickly, and was exceeded, confirming the breakout was, indeed, bullish.

"Take at least 'some' profits when targets get MADE."

On September 20 SILC nailed a successful retest of the Symmetrical Triangle on a Bullish Hammer candle. Retests of breakouts are to be expected, especially after any target gets MADE, and at that point, SILC was looking like a champ, and there was every reason to think that the next target of 32.79 also would get MADE. Until....

As you will remember, stocks often trade in "fractals," or "patterns that repeat," like XING in January, 2007. The Symmetrical Triangle in blue in this chart is a much smaller version "or, fractal" of the one in black. Symmetrical Triangle patterns are "continuation patterns," so we expect them to breakout and continue in the direction of the trend, as SILC did on the September 4 Breakway Gap. The chart was VERY bullish, and the breakout was to the upside.

But, be careful when "continuation patterns" DON'T breakout in the direction of the trend and go the other way, because that's a strong sign of a reversal in the trend. SILC broke down out of the Symmetrical Triangle (in blue), and when that occurred on October 22, the stock not only came under some selling pressure, it went into serious technical failure.

I haven't heard of this stock until you asked about it this morning, so I don't know "the reason" for the October 22 smackdown, but as you know, I always say look at the stock's REACTION to earnings, analysts' upgrades and downgrades, news releases, etc.

I'll guess that SILC released earnings that "disappointed" because it has enjoyed a spectacular gain of 600%+ in just over a year, so a case of "Buy the rumor...Sell the news."

But, whatever "the reason " for the selloff was if you know of one, this also was going on, technically:

1. The Symmetrical Triangle "fractal' (in blue) broke to the downside, and it "shouldn't have." It "should have" resolved in the direction of the trend, and by breaking DOWN, it was giving a strong indication of a trend reversal.

2. That breakdown put a target of 17.28 IN PLAY.

Math: Subtract the low of the pattern from the high (6.01 points), then subtract that answer from the data point along the lower trendline (23.29) to derive your target.

3. Remember the successful retest of the top of the Symmetrical Triangle, at 22.23, on September 20? That also got broken to the downside, and it "shouldn't have." The work of establishing technical support there already was completed, and when it WASN'T support any longer, on October 22, that brought in more "technical selling" from the players who were using it as their "stop loss."

4. After that broke, next support was another retest of the top of the Symmetrical Triangle, which came in on October 22 at about 21.68. When players saw THAT wasn't support either, and that SILC was going back inside the BIG Symmetrical Triangle, many of them threw in. And, as SILC went farther down into the Symmetrical Triangle, more selling. UGH. The 17.28 target IN PLAY nearly got MADE in one day!

October 23, the bottom of the Big Symmetrical triangle came in at 17.24, and SILC nailed that trendline EXACTLY. The low on the day was 17.24, and SILC finished the day on a Bullish Hammer, giving longs a chance to breathe a sigh of relief!

When a stock retests a trendline and holds it, that's called a "trendline validation." The market is telling us, "Yes, that IS support." Many technical players will put in their orders to buy right there, or a penny or three above it.

A validated trendline becomes important because, if later on the market tells us, "That no longer is support," that's an "uh-oh..." How much of an "uh-oh" depends a lot on the length of time that trendline has existed. In this case it has existed since June, and it's part of a pattern that has existed since April. If it gets broken to the downside, everyone who is holding long ABOVE that trendline is holding the stock at a loss, and in this case, it's of 7-months' duration.

October 29, SILC violated the "validated trendline" on an intraday basis, but closed the session out back above the trendline, on a "hopeful-looking" Bullish Hammer.

"Bear markets descend on a cushion of hope." At yesterday's close, SILC broke below the BIG Symmetrical Triangle, puttting a downside target of 7.54 IN PLAY (the height of the pattern, subtracted from the point of the breakdow).

As we know, targets don't always get MADE. They only are what the measurement of the pattern added to or subtracted from the breakout or breakdown suggest. But, we also know that 7-months worth of longs who purchased the stock and who haven't sold, now are trapped above the trendline with a loss, and that they now represent "overhead resistance."

The October 30 breakdown "could be" a Bear Trap, and if it is SILC "should" get back above that broken trendline VERY quickly, because players who hold the stock and who allow for that possiblity will become weak-kneed if they see much more downside in the stock.

Best of luck to you with this one, Annie!