Below is a slider quiz to test your trading ability. Captions appear below the pictures for guidance, so be sure to scroll down far enough to read them.
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What chart patterns can you find? Look for the following (if you find others, great!): 2 head-and-shoulders bottoms, diamond top, ascending triangle, inverted and ascending scallop, descending broadening wedge.
The answer is on the next slide.
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Price has gapped lower... (upper right of chart)
Question 1: Do you buy or sell short the stock?
Question 2: What is your price target?
Question 3: What is your stop loss price?
See the next slide for answers.
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Answer 1 (buy?): Price has made a new high (A) then formed a lower high (B), one sign of a price reversal. If you draw an up-sloping trendline (C) along the low prices, price has gapped through it.
It's time to sell or sell short.
Answer 2 (target?): Find the target price in several ways. You can use the measure rule for trendlines. Another method is to find underlying support. I show a meager level with the red
horizontal trendlines. Another method is to measure the rise from D to A and then compute a Fibonacci retrace of that amount. D and A were chosen because they are turning points.
The 38% retrace level is in the middle of the horizontal red lines, about 38.50. The 50% retrace is at 36 while the 62% retrace is at 34.
Answer 3 (stop?): If you shorted this stock, a good stop price would be above B, the high at 47.74 (not adjusted for splits).
You can see that price continued down. The point of this quiz is to use trendlines as sell signals. They are one of my favorite tools, especially for short-term trades where
a bearish chart pattern may not appear.
When price plunged through the 62% Fib retrace line, that confirmed the downward move. Notice how the 62% level acted as support in November.
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