This is the chart of Silver Wheaton (SLW) that we looked at after the April 8 close when we suspected (question marks) that we might be looking at a DOUBLE upside "Fakeout Breakout" of a nested Symmetrical Triangle (seen in the next chart), and a possible morph into a broken Rising Wedge.
Question: When a pattern breaks out or breaks down, how can we know for sure if it's for real, or if it's a fakeout?
Answer: We never can KNOW anything about the stock market beyond the last candlestick that we can see on the chart. What we can do, though, is prepare ourselves to FOLLOW what Ms. Market is telling us as the chart evolves, as best we can.
In this particular case, we prepared by identifying where Trendline #1-#3 would come in during the next trading session, Monday, April 11, and where that trendline would come in during the sessions that followed. If that trendline got violated by very much, especially on a closing basis, we would KNOW that we were looking at a morph from the nested Bullish Symmetrical Triangle breakout into a broken Bearish Rising Wedge, not because we predicted anything about the future, but because we were FOLLOWING the chart and we actually could see where a technical breakdown would occur, if it did.
The nested Symmetrical Triangle is in blue, with the little Symmetrical Triangle (in purple) "nested" within it. That "nested" pattern broke out to the upside on April 6. It was a "Gap And Crap" candlestick, but it held the breakout on a closing basis. April 7, SLW closed back inside the pattern, which always is a red flag "to be a little suspicious" of the breakout. The fact that SLW also broke out beyond two-thirds of the way to the apex of the Symmetrical Triangle was another reason that we were a little suspicious of the breakout. As we discussed when we looked at the first chart above, the failure rate in stocks that have late breakouts is higher than those that breakout prior to the two-thirds marker. I forget who did the study on that (Thomas Bulkowski, maybe?)
April 8, SLW broke out to the upside again, and everything looked fine (which is where we were in the first chart above). At that point, given how bullish this stock has been and given that it was able to break out again, it was a bit counterintuitive (contrary to what we 'think' will happen) to think that SLW would morph into the broken Rising Wedge in the very next trading session, but that's exactly what it did.
SLW came down on a Bearish Engulfing candlestick that also was a 4-Close Reversal (closed below the prior four days' closes), took out the rising Trendline #1-#3 at 44.44 and closed the session at 44.11.
Did we KNOW that was going to happen? Certainly not. Well, maybe one of you did, but I certainly didn't. All that I am capable of doing is trying to FOLLOW Ms. Market, as best I can. If I had to earn my living trying to predict anything, I'd be bankrupt. I'm terrible at it.
The second counterintuitive move (a move that is contrary to what we intuitively would expect) was the Scotia upgrade of SLW on the morning of April 15. Although it was an intermediate-to-longer-term call on the stock, upgrades often give a stock a short-term pop to the upside, so one would expect at least a pop to the upside, especially given the fact that the upgrade was a pretty significant one: from $47 to $58.
However, at Friday's upgrade by Scotia, SLW was sitting at Data Point #4, at the top of a possible Bear Flag, better seen in this intraday chart than the daily chart. And, we knew that the short-term trend in SLW had turned bearish at the Rising Wedge breakdown, at 44.44, on April 11.
Counterintuitively, SLW got no pop to the upside out of the upgrade, as one would expect, but rather, SLW sold off from the top of the Bear Flag right at the upgrade (White Data Point #4), and continued down in Friday's session. Yesterday morning, the Bear Flag broke to the downside. The target of 40.32 got MADE and the March 18 gap at 39.91 got filled with four cents. The session low was 39.95.
Interesting juxtaposition of the bullish upgrade and the bearish technicals: Short-term, the bullish call got trumped by the bearish technicals.
Market Lesson: Play what we see IS HAPPENING, not what we think should happen."
Math for the Bear Flag:
43.85 - High of the pattern
41.72 - Low of the pattern
43.85 - 41.72 = 2.13 points of downside on a break of the Bear Flag, below 42.45.
42.45 - 2.13 = Target: 40.32 IN PLAY
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