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3.42 PMC-Sierra

The chart in Figure 3.12 shows an Acme M short enirj on Januarj 25", 2001, with the number ofbearish pattems equal to three:

- A Hook (H) down after a three-bar pullback, and

- A Tail (Ll where the open and close are near the low ofthe range, and

- An unsuccessful Test (T) ofthe previous high three bars earUer.

The original position size ofthe entrjwas 200 shares. Both halves ofthe position (100 shares apiece) were co-ered on the following day for almost 40 points These abmpt re-ersals offortime tend to occur before an earnings release. Bad news just happens to leak out, awonderfnlly human aspea ofthe business.

>MCS LAST-Daily 02 /2 01 Hov Avg 1 linelClose.SO.O) 93.8S4

115.000 11D.D00 105.00D 10D.O0D

Fure 3.12. PMC-Sierra Pattem

Note how the stock went in the CAN after the initial short entrj was triggered On the subsequent bar, the stock moved below its 50-day moving average, and closed near the low ofthe day. This chart exemplifies a confluence ofbearish pattems and only increases the probability of awrimii trade The trader may choose to make the Acme M sjstem less restrictive by removing the swing criteria and just focusing on these pattern clusters. Again, the trader mskes the choice ofwhich stocks will be eliminated by the scans and how many need to be reviewed by eye. As will be demonstrated in Chapter 9, the human eye and brain are not always better judges of charts than the computer.

3.43 Check Point Software

The chart in Figure 3.13 shows an Acme M long entrj after a double hook. First, some longs were sucked in at a tick abo\e the high on the 13* and then some shorts were entrapped a tick below the low on the 14* (not agoodideaon awide range bar). After the trade was tiiered, the ATR factor prevented the trade from getting stopped out at the previous ds low on the 18*.

Currenfly, the better methodologj seems to be fading the swing traders aroimd the lows and highs, i.e.. there appear to be more hooks. pro\ing that just as a particular stjle oftrading becomes popular among the masses, the lesshkely it will work in the future. Consequenfly, the ATR factor on entries eliminates many ofthese types oftrades.

The Acme software defines mechanical trade exits for its sjstems; research has shown that two alternative sjstematic methods work equally well:

a E.xit the long position when the close is below the open, and exit a shon position when the close is greater than the open. This technique works after a swing of se-eral dajs because a trend reversal may be forthcoming, beating traders who operate aroimd highs and lows.

a Do not use profit targets after a holding period of four or five dajs. If the trade is stiU going in your direction, then the market is ha\Tng a rare extended rally or decline, and the swing should be ridden out.



51.000 «.


45.000 h44.D00 43.000


- l.l(.(h..l S..ii1v.1,, l..M..


3.4 Examples

3.44 New York Futures Exchange

The NYFE cliart m Figure 3.14 shows an LE M signal. First, note how the stock has bounced off a double bottom and is forming a triple top. Second, the chart has formed abig "W", similar to the crisscrossed palm trees mlts aMad, Mad. Mad Mad World. This bulhsh pattem portended a major market rahy in early March 2002.

iNFLASTDaily 02/2& 2 AcmeMat1(etPelteri>s<10.10)



S85.00 580.00 575.00 570.00 565.00 -SS0.O0 555.00 550.00

Iilgiire3.14. NYFE Index Pattem

In Chapter 5, we discuss geometric formations such as triangles, double bottoms and triple tops. The purpose of co-enng these pattems is to - as much information as possible on the chart. In the example above, the double bottom from eafly to late Februarj provided supporting evidence for the long trade entry. For the trade exit, the approach to a triple top was a clue that the up trend may stiU have been in effect, and the position could have been held longer to see ifthe index could break out - the triple top.

Stiidsman uses the term "indicator piling" to express the danger of using similar indicators that give the trader a false impression ofa sure winner [30]. Further, BoUinger stresses the need for independent -ariables such as volume to confirm trades [1]. When designing or implementing a pattem catalog, strive for a diversi of patterns, each with a unique concept.

II.ll...,l..4h.m. Will

.5 Comverse Tectinology

The chart shown in Figure 3.15 exemphfies the "CAN do" spirit: a Cobra - the mo\ing a-ere precedes a 15° move in four days.


3.4.6 Nasdaq Composite Index

The chart in Figure 3.16 is notjust for accountants.

LAST*iily OSrtš2001 Mov Avg 1 llr«Clo»,5a,0> 1.


.« ».«


I-.. Si.U .1. I il,.l M.-........jii.lS.....

-1 -.1.1 . N.i-..l.i.t. .>.ii...

3.4.7 Computer Associates

Loot for stods 1 the market trend, as the Computer Assocrates chart illustrates in Figure 3.17. Before the gap down, rumors were swirling about the compais accounting practices during the Emon scandal. Two d-s later after the trade , se-eral major newspapers reported that the company was imder investigation by the SEC.

ULAST4)july 02/27/2002 Mov Avg 1l)ne<Close,50,0) 31.

t t j.

AcmeSX++ AcmesX+

. 34. -32.000 - -28.000 2 . -24.000 22 20.000 18.000 18.000

Figure3.17. Computer AssociatesPattem

4 Float Trading

Ideas mat work tlvongh the braim and tlie (oim of good toid brave men. or tliey me no better tljcot dreams.

Ralph WaldoEmerson

If anyone ever asks you why the Intemet stocks soared as high as thej- did in the late 1990s teh them it was the "low floats". This was a group of stocks with good eamings and re-enue momentum, but more rmportantly, the demand outstripped the supply of shares. Because the companies had only recently gone pubhc, few shares were a-ailable for trading (the float); some companies issued only three million shares, the equiralent of300 investors owning 10000 shares apiece. Compare this number of shares with established companies such as General Electric, as shown in Table 4.1.

Table4.1. Company Float Values


9.84 billion shares


301.0 million shares


35.5 million shares


17.9 million shares


7.81 Uio slae

As the prices of Internet stocks soared, fueled by the short sellers who were repeatedly forced to buy in their shares, the companies declared stock splits. These splits increased the number of shares, thereby increasing the float. After two or three splits, eventually these companies had floats of hfty to a hundred million shares. With prices in the hundreds, these companies attainedmarket caps greater than the largest companies in America, in some cases , ten bil

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