I still have not bought gdx - 3/27/12

In the last four days GDX made a new bottom followed by a five wave flagpole that broke out of a month long downtrend channel. After breaking out it formed a two day, three wave, flag that rested on the downtrend channel break out. The description sounds almost perfect, but I didn't buy and GDX is lower this morning. Why did I not buy what appears to be a perfect set up?
I will describe what happened with the charts. The top chart is a four week long, ten minute bar, candlestick chart of GDX. And the lower chart is the last eight days of the top chart.

The chart above shows the channel, the break out, and the two day flag. This chart ends on 3/27/12.

This chart is the same as the end of the first chart. First we have the double bottom which occurred on 3/22/12. The second bottom was $0.03 above the first. It would have been nice to buy there and make a few percent, but I mistook the weak flag that formed for a triangle and thought it would go down the next day. After the second bottom, the five waves up are labeled 1 -5 and the two waves down are labelled A, B, & "C?"  Most of my buys are single day flags, but I do buy multiple day flags when the set up is right and this looked right.
The first hint of a problem came just before the point labeled B which is at the end of a one day bearish flag. In the last few seconds of trading that day I saw at least 10 blocks of 20,000 or more shares sell. Normally, those that bought in at the bottom would not sell all of their shares just after a channel break out, but the big players were definitely selling. That told me to watch out.
The next day, 3/27/12, GDX formed a very nice flag resting right on support, but the gold bugs index ($HUI) spent most of the last ten minutes of the day below support, only managing to peak above it at the close. This was another warning.
The end of a two day flag usually rises off the support and ends up forming a white candlestick on the daily chart, but this flag formed a black, bearish engulfing candlestick the day after a hanging man candle stick. That's double bearish and another warning.
The last half hour of trading in the general market was marked by a series of new lows for the day, forming bearish shooting star candles on the charts. If the general market goes down, it can easily pull gold stocks down. Another warning.
Finally, only two of the ten big sellers bought back at the end of the day on 3/27/12. If it was truly a bullish flag, I would expect them all to buy back in. That was enough for me and I decided to wait for confirmation. GDX is plunging today so I'm still waiting.
Happy trading.

Price channel break and a trading flag

For swing trading I use price channel breaks and flags for both my buy and sell signals. A channel price break signifies a change in trend. A buy occurs when prices are dropping in a down trending channel and then something happens causing the price to break out above the channel line. Below, I have an example of a price channel break and a trading flag which is a buy.

Price extremes form a shallow up trend channel after a large spike up at the beginning of this chart. This uptrend channel is shown in blue. Up trend channels are drawn by placing a rising line between the two highest highs and then drawing a parallel line from the lowest price that occurs between them. A price drop below that parallel line is an indication that the trend is ending. Often, a certain percentage below that channel is used as a stop loss price where your stock would sell to limit the amount of profit you give back.

Once that channel is broken, and two down sloping lows form on the chart, a down trend channel can be drawn. This channel is in red and is drawn with a line between the two lows and a parallel line drawn from the highest price between those lows. Prices broke above the channel three times before giving up and heading down. After an up channel break down, I ignore these first price break outs from the new down trend because they are only testing the break down. There is a time when they are buys, but it is rare and not the subject of this post.

After prices break lower again, a new, wider, and more sustainable down trend channel has formed. (shown in green) This is the one we want to see prices break out of for a buy and, after several days, that is what happens. After such a break out, a flag nearly always forms. The flag, shown in orange, is ideal for end-of-day trading because it rests right on top of the green channel and rests on the support of an old low, in red. This flag is what this blog and my website are named for. A buy at the end of the flag day is an excellent entry point and the next morning prices gap higher and head up.
There are times when the flag straddles the down trend line, but still rests on an old high or low, and other times when the flag doesn't form until after a very large rise. These can still be bought if they rest on support.
This type of buy has very limited risk because a stop can be placed just under the old low, often risking less than one percent on the trade.
Happy trading.