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The first concept is the less resistance, the better.
In the chart above, XYZ trades at 18 to 20 before declining to a range of 13 to 15.Then it breaks out above 15.
According to Stan’s system, this is a weak buy at best.
It’s not a strong buy because there is resistance at 18 (and all the way up to 20).There is a lot of overhead supply.
Although most stocks building from a base will have overhead resistance at some point in their past, the further back the better.
A couple of years is good, but 10 years is even better.
Stan is not obsessed by chart patterns, but one that he does like is the head and shoulders bottom.
Here there is an initial decline to a new low to form the first shoulder, followed by an oversold rally (point A).Then there is a smash that drives the stock to a new low (the head).Then the stock rallies to the same resistance level as point A (now point B).Next there is a decline which can’t make it to a new low, or indeed, even as far as the previous low (the right shoulder).And finally the real rally begins.
There should also be a trendline (moving average) that connects points A and B.
This is known as the neckline.It’s important because when the price breaks up through the neckline is the best place to buy.
TRIPLE CONFIRMATION PATTERN
Stan also talks about the triple confirmation pattern than he discovered in the 1970s.
This pattern is used for longer-term trading than the techniques that we’ve covered so far.It’s designed to select stocks that are setting up for significant advances.
The three signals are:
heavy volume – more than twice the underlying level, and for several weeks from the start of the breakoutrelative strength that begins as negative or close to zero, but breaks out decisively to the upside along with the pricea big price move up (40%+) before the breakout signal – this implies a base pattern that has relatively wide swings up and down within the overall sideways trend
