tactical trader

I use chart patterns in my trading because they give me tips on how a stock will perform. Sometimes the tip turns out to be a lie, but that’s okay. I use stops to limit losses (don’t you?). When the tips are accurate, I clean up. This article discusses two such tips: partial declines and partial rises. They forecast the breakout direction from a chart pattern.

Figure 1 - Broadening bottom. A partial decline sees prices tumble but they do not come close to the lower trendline. Point A is a small partial decline that doesn’t work out.

When I wrote this originally back in January 2003, we were still in a bear market, and so I concentrated on partial declines — they predict upward breakouts. What does a partial decline look like? Consider Figure 1, a chart of a broadening bottom. That’s my term for what’s usually called a broadening top, but I found performance differences between tops and bottoms. For the latest statistical information, consult my book, Encyclopedia of Chart Patterns, Second Edition.

Partial Declines: Broadening Bottoms

In a broadening bottom, prices enter the pattern from the top (that is, after a downward price trend), but they can exit in either direction. The pattern sports two trendlines that broaden out over time, one trendline slopes up and the other slopes down. The trendlines should touch at least two minor peaks on the top and two minor valleys on the bottom with little white space in between (good side-to-side price crossings). Volume appears irregular, but usually climbs as prices rise and recedes as prices fall, like that shown.

Once you have a valid pattern (at least two touches of each trendline), then look for a partial decline like that shown. A partial decline is just as it sounds: Prices drop but do not touch or come near the bottom trendline. A partial decline suggests an upward breakout on the next price crossing.

The time to buy is when you are sure prices have started rebounding, completing the turn at the bottom of the partial decline. I have not found a guaranteed way to do this, so it’s a judgment call. However, Fibonacci retraces can help. If the decline turns at 50% and especially at 62% of the prior up move (B to C), then chances increase that an upward breakout will follow. Use stops to limit an adverse move, say $0.15 below the partial decline low…