Almost-Breaking Pattern

When you go to any major financial web site and you look at news, you’ll see lists of stocks that just broke new ground and are in an all time High or a new yearly high level.

That is fine for the news but it might be too late to have a decent profit at a minimal risk which is what you are looking for.

The pattern you need is called “Almost Breaking” and is a pattern of how the chart of the stock looks just before the break out of resistance.

This is a not so famous pattern and not many web sites publish it regularly.

Some might argue that the pattern is not a sure thing and the stock might bounce back from the resistance level. That is true and you should be aware of the resistance and its meaning.

A real example from today, July 31, 2014 is NVO or as social networks like to tag it: $NVO. It is ranked high in the monthly Modified Magic Formula, near the top 20% and is near the yearly high of $48 which it reached at the end of February. Later it bounced several times between $42 and $46 and might soon break above the $46 level. You can make a profit from this situation and it might even go above $48 although there’s a smaller chance of that happening soon.

NVO_JULY31_2014

Forecasting stock moves is similar to forecasting the weather. This is not the same as predicting the future. Predictions and Forecasts are not the same. Forecasts have intrinsic uncertainty and when the weatherman says tomorrow will be sunny with a chance of showers you get ready for both and know it will be a rare outcome if it pours but you’ll be ready and adjust.

Forecasting the weather in Israel (where I live) in the summer is easy. It never rains and it’s always hot and sunny. This is the situation you want!

Forecasting the stock market is difficult most of the time but easier in some occasions. You want to risk your hard earned money on the rare situations that it’s easier to forecast and you have an asymmetrical outcome. Like tossing a coin and winning $200 if it comes out heads or losing $10 of it comes out tails.

This is the exact situation when the stock has a history of trying to move up and bounced a few times at the same price level. If it tries enough times, it will succeed sooner or later.

What you want is to enter an option combination (not binary options) namely a cheap call spread with a high probability of winning and a low cost.

You can also use a bear put spread in the mirror image of the pattern where a stock moved down in the past and has a support level stopping it from going lower and it nears that level again.

The strategy works because the call spread (or put spread) is especially cheap before the stock crosses the resistance level and will be hugely rewarding if and when it succeeds.

This is known as “Buy the rumour and sell the news” way of thinking, only now it is attached to a specific strategy that works that implements it in a concrete way.

This web site publishes daily stocks that pass the combined filter of a modified “Magic Formula Investing” and is near a yearly resistance or support level.

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Ami Heines