BP: A Case Study

Now, I know how much easier it is to look at a chart after the fact and play the great chart reading expert, but that doesn’t mean there isn’t something to be learned reviewing charts of the past and making detailed notes for future possible plays.

In the case of BP we definitely have a huge trend, that, if we pay attention, will teach us much about how trends develop and when and how they should be traded. With that said, here’s the current chart:

Wow, talk about a trend.  If you know what gets me all mushy and inspired on a chart then you know that this is it.  While trends only happen 30% of the time, when they do you better WATCHOUTNOW!

When I see a trend like this I like to take it back to the beginning to see if there’s anything I can spot that might have hinted that the old trend had ended and a trend reversal had begun.  Now, I’ll say right up front that I don’t like to short stocks and I don’t do it often.  Heck, even the great William O’Neil says he’s only made money shorting 2 out of the last 9 bear markets.  But I do like to protect my capital, so if you also don’t like to short, some of this will help you know when to get out of a trade.  So let’s take a look at the first warning sign that BP was in a bit of trouble…

Whenever you see something like this you should immediately think: trouble.  This is a big wide range break of support on very strong relative volume.  Relative volume for those who don’t know just means the volume is big compared to what the volume has been lately.  Another thing we have is this:

A clean trendline break.  Witnessing this confluence of events, already if you are long BP you should be thinking: WHATCHOUTNOW!  And certainly, in cases like these it pays NOT to be a hero.  Why not just get out and see if things return to normal in a couple days.  What will that cost you?  A $5-10 commission?  Here’s what happened next:

A sizeable (though not huge) GAP down on increasing volume.  At this point, if you are not going short you should definitely be out of the position.  Not worried about whether or not price is coming back, but concerned that the situation could get much worse.  Because it did.  Here’s what happened next:

A MASSIVE break to the downside on HUGE volume.  And that’s why I used the word “relative” earlier, because in the market everything is realtive to everything else, and what looks HUGE yesterday could look TINY today.  I don’t need to say you should be out of here by now.  And the sad part is that I know a lot of traders wern’t.  How do I know, because I lost half of my account when I first started trading on a trade just like this.  More of that in another post, but for now, let’s look at what happened next:

Another break to the downside via bear flag pennant downside move.  Which brings me to my next point, ORGANIC CHART READING.  In this world of going green doesn’t that name just make sense?  I think so.  And here’s what I mean…  Instead of trying to force your will onto a chart, why not let IT tell YOU what to do next?  If you are a trend trader, you are coming from the premise that you CANNOT PREDICT THE FUTURE.  If you CANNOT PREDICT THE FUTURE then you have to wait for a signal, from the chart, that a change has taken place.  You do this by watching the chart and taking note of the swing highs on the way down.  If price is ever going to reverse then one of those swing highs will have to be taken out.  And when it is, you can get in.  Here’s what I mean:

Do you see how none of these swing highs was taken out all the way down?  Waiting for them to be taken out before entering long would have kept you safe and that’s what I mean by Organic Chart Reading.  Let the chart tell you what to do next.  You’ll be a lot more relaxed.

Now, is the swing high being taken out a guarantee a new trend has started?  No way.  I have already said that trends fail 70% of the time.  But this is a great way to keep you out of stocks falling like rocks!  You just don’t want them!

Good luck.  Trade smart.