How to Judge Pattern Behavior

How to Judge Pattern Behavior

How to Judge Pattern Behavior 1024 546 Steven Dux
Welcome back to

this week's lesson.

Today we are going to talk about momentum shifts. The two stocks we want to talk about is $LINU and $RTNB.

They have similar patterns and once you recognize the weakness, you can make decent money on the downside, but you can also make money on the upside as well. Let’s start with $RTNB. Let’s take a moment to talk about the momentum.

STOCK TICKER:

$RTNB

When you try to trade a stock short with heavy volume its hard to judge, where does the momentum shift?

The habit of this stock is that in the morning it squeezes higher. You must adapt to the habit of the stock. We see it spikes early in the morning and continues to fail on any follow through to the upside. So, to be able to trade this on August 21st to August 25th, try to adapt to the momentum. On August 21st we see a morning spike on, August 22nd another morning spike and again on August 23rd another morning spike! I typically participate on the third day after seeing the pattern repeat itself over and over again. My expectation was to see another morning spike because it did two days in a row and we have high odds of winning on the third spike. I played this both ways, by shorting the spike and buying the dip.

The stock pattern behavior has been similar for the past few days.

After the third time seeing this pattern, I am done shorting and looking for dips to buy. I will keep watching the patterns to see if the momentum shifts or behaves differently. On the 4th day, the morning spike happened again, but the spike didn’t hold so I shorted it again. If you know how the stock is going to behave so you can take advantage being short or long. We want to watch how these momentum stocks behave the two days before.

It’s likely it will do the same thing on the third day. If you look at the 21st, 22nd and 23rd you see this pattern/ behavior repeat. On the 25th you see the morning spike fail, followed by a huge gap down in the pre-market and we see the same pattern, another morning spike but fails. When we see it spike in pre-market we do count this as a morning spike. Pre-market spikes can replace the spike after the open because…

We know it doesn’t hold the morning spike, we can take advantage and short into resistance on the spike.

STOCK TICKER:

$LINU

On $LINU we see the same thing, a big morning spike until the afternoon and it comes back down.

The next day the pattern repeats itself. If you draw a horizontal line you can clearly see where support and resistance is. The support is around $1.92 and the resistance is around $2.50. When the stock behaves the same way two days in a row, typically it will behave the same on the third day. But this time, we did not see the morning spike until 10:30am (08/31/17). The difference from the 30th is that it would typically spike in the afternoon. You can see it dipped into the support level at $1.84 and held (8/29/17). So on $LINU when it behaves the same way two days in a row we can expect it will do the same thing on the third day, but what happens if the stocks panics?

Most people would expect the same thing, they would buy the dip

…and hope for a delayed spike. That’s exactly what $LINU did on August 31st, it dipped to $1.80. We’re looking to buy right above the support area. It dropped to $1.90 then spiked up to the main resistance level at $2.50. I did not short the spike into resistance because I did not want it to form a cup and handle on me. A cup and handle is a bullish pattern, and it’s hard to tell how many shorts are stuck in $LINU (leading to a short squeeze). For me, the spike was not large enough to get short into. We could see a larger move over $2.50 into $3.00 with a possible cup and handle and short squeeze taking place.

I would be more comfortable shorting underneath the main resistance level after a squeeze, rather than shorting right on the major resistance level because if it breaks over this level it can squeeze much higher. On August 31st we see it fall from $2.50 and dip down into $1.93. It landed on the same support level, here people try to dip buy and we see that level fail, which can lead to morning panic. In $LINU we typically see the same behavior/pattern repeat 3 days in a row. We see this pattern with $RTNB as well. On $LINU when the support broke at $1.83 it becomes solid resistance. Many times, in the stock market, we see the same patterns repeat.

STOCK TICKER:

$DRYS

The stock had bad news, they are issuing 100 million shares at $2.75 and we saw the stock tank all the way to $2.10.

In the market nothing goes straight up or down, it will trade back out part of that vertical range. When $DRYS bounced after going straight down, I shorted it at $2.80 (a round number) to short into the main resistance area. On a 1 month 2-minute chart we can see the main resistance is around $3.00. Shorting at $2.80 I am risking 20 cents to make between 50-60 cents. We wouldn’t expect the one-month resistance to be taken out in one day. I covered most of my $2.80 short around $2.60. The next day it was also a great short because it was holding the $2.70 level. If you get short here, you are risking 30 cents to make a potential 50 cents. Not a bad risk-reward setup into solid resistance.

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