Some time on Wednesday after the market had opened, CNBC reported that three analysts were bullish POT. Last I had looked at the stock, it was trading in a channel (Rectangle) and when I looked at it on Wednesday, I could see that it had broken out a week ago and that it was moving higher. I don't like to chase those.
As we've discussed, analyst upgrades and downgrades can present good opportunities. Sometimes they get it right. Sometimes, they're a good fade (aren't we all?). I decided to look at POT more closely on Wednesday night after the close since it clearly had broken out, to see if I could find an entry long.
Beginning at the December low, the first pattern (in blue) is a Bullish Falling Wedge, my LEAST favorite bullish pattern because when it breaks out, all of the candles in the wedge that preceded the breakout represent immediate resistance.
POT enjoyed a nice six-day rally coming off the Bullish Falling Wedge breakout, then began to trade sideways in The Rectangle (pattern in green) as it worked off overhead supply from The Wedge, and overhead supply from 2008.
There are so-o many charts to look at, I need to hire a team of elves to do nothing but follow maybe five charts, and then alert me when they start shaping up nicely, like POT did in late April. LOL.
POT formed a TRIPLE nested pattern: The two Symmetrical Triangles (small one in purple...large one in black), nested within the six-month Rectangle (pattern in green, better seen on the last chart).
Once Black Data Point #4 and Green Data Point #4 (same data point, on April 23) established the "missing leg" of both Symmetrical Triangles...KABOOM!! Both triangles broke out on Friday, May 1, then the Rectangle broke out in the following session, on May 4.
We can see, as we have a number of times, how nice these breakouts from "nested" patterns, or multiple patterns can be. It would have been nice if the three analysts all upgraded this stock back on April 23, or shortly thereafter! LOL.
However, all was not lost as far as an opportunity to get long POT was concerned.
In the early going yesterday morning, POT rallied to 105.49, establishing a flat top with Wednesday's high of 105.44 for a possible Bullish Ascending Triangle. It quickly gave back the gains, then formed...
...this Symmetrical Triangle, "nested" within the Ascending Triangle. We know how much we like those! I got long at 104.12 with a mental stop below 102.96, Data Point #4 of the Symmetrical Triangle. I forgot to mark the Data Points on the chart, but it's "the last low," prior to the breakout. NOTE: Nice retest and validation of the breakout (White arrow).
The Symmetrical Triangle broke out at 104.72, which put an upside target of 107.70 IN PLAY for a nice 1:3 risk:reward on the trade:
1. A stop out below 102.96 would be a loss of $1.17 on the trade
2. If the 107.70 target got MADE, that's a gain of $3.58 on the trade
3. Risk:Reward is 1:3.
Math for the Symmetrical Triangle target:
105.49 - High of the pattern
102.51 - Low of the pattern
105.49 - 102.51 = 2.98 points of upside on the breakout at 104.72.
104.72 + 2.98 = Target: 107.70 IN PLAY
I sold POT when the 107.70 target got MADE. Gain: Just under $3,600.
My plan was to re-enter POT long on a retest of the top of the Ascending Triangle (105.44-105.49) since a target of 110.04 still is IN PLAY from that breakout (the Ascending Triangle), but it didn't pull back that far. The afternoon low was 106.30.
Math for the Ascending Triangle target:
105.44 - The more conservative of the 105.44 and 105.49 highs
100.84 - Low of the pattern
105.44 - 100.84 = 4.60 points of upside on a breakout
105.44 + 4.60 = Target: 110.05 IN PLAY
POT got only to 108.60 in yesterday's session.
7 comments:
Thanks for educating me on your foolproof method for doubling my money using whiskey futures. Today my question is why you determined to exit the POT at one target as opposed to waiting for the second higher price? Would a trailing stop given you more flexibility or was it as simple as a bird in hand?
Good Morning, Mark,
You're welcome for the education on whiskey futures ;)
Several reasons for selling POT at the Symmetical Triangle target:
1. "Take profits, or at least 'some' profits when targets get MADE." Yes, it's the "bird in hand." There's never any guarantee that targets will get MADE, so the Ascending Triangle target of 110.04 isn't by any means a sure thing.
2. I was in the trade for about an hour. Nice pay. Take the money!
3. Basis the Hourly chart, the SPX has put in what looks to be at least a short-term "M"-Top, or Double Top (synonymous) at 829 and 830. The pivot of the "M" is 901.36, on May 7.
Yesterday while I was long POT, the SPX was rallying into the high 890's, just below that 901.36 resistance, so that also influenced me to take the sure thing (sell when the 107.70 target got MADE) and look to re-enter at the 105.40's top of the Ascending Triangle, if I got the chance.
I didn't get the chance.
Oops...the short-term Double Top in the SPX is 929 and 930, not 829 and 830.
great blog.....great chart work...
what are the chances of POT making it to $121 (38% retrace) or $143(50% retrace)...both would be gap fills also?
looks like the target for the black wedge is around $121 also?
the breakout was at the 23% retrace...funny how people discount technical analysis!
Hi, John,
Thanks very much for the kind words.
Yes, 121.29 is IN PLAY from the Black Symmetrical Triangle, and 125.04 is IN PLAY from The Rectangle breakout (the channel in green), as long as POT trades above both breakouts.
Beyond calculating the targets, I never have any idea if they'll get MADE or not, John, and I'm lousy at predicting anything. I just try to follow along, as best I can.
For that reason, my focus is on establishing a decent risk:reward on a trade, like the 1:3 risk:reward that I explained this morning on the Symmetrical Triangle breakout to the 107.70 target, rather than focus on trying to predict the market. I'd just be guessing.
By the way, the risk:reward on the Ascending Triangle target of 110.04 was better than that, a 1:5, but I decided not to hold out for that target since I expected a selloff in the general market, which we're getting today. Despite the selloff, the 110.04 target ended up getting MADE without me, right after the open this morning. Dang it. LOL.
Yes, it amazes me how so many people discount the value of technical analysis. Go figger, huh?
Good luck to you, John, and have a great weekend!
Hello melf
thank you for providing wonderful information.
Actually, I know you from xing yahoo message board sometime ago.
I am shorting pot at $105. and as of friday close, spy retrace to 760
or 800, instead you saying st spy 920. I saw last week when market down, low volume and push up was not as strong as previous.
Can you share with me what is your insight in st.
thanks in advance
P.s. I like to follow your trade but i am having little difficult understanding your kind analysis
I will bother you for information,
if you don't mind
Good Morning Danny,
I'm sorry that you had difficulty understanding my analysis. Basically, I was describing the patterns in POT and the targets that went IN PLAY off the breakouts.
I'll have some comments on POT in this morning's post.
Good luck to you!
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