One of the most reliable patterns I’ve observed over my decades in the market is also one of the simplest. Yet, too many traders ignore it — either jumping in too early or failing to recognize it at all. Let me walk you through it.
This pattern starts with a strong stock.
Imagine one that’s been on a tear — breaking out to new highs and attracting attention across the market. But, like all trends, it doesn’t last forever. Eventually, the stock pulls back, falling below its 50-day moving average and — in some cases — the 100-day moving average. At this point, most traders assume it’s a failed trend.
But that’s where they’re wrong.
Instead of collapsing, the stock starts to compress — a period of tight, sideways action between the 50- and 100-day moving averages. It consolidates for weeks, sometimes a month or more, as the market digests the prior move.
This is where the magic happens.
When the stock finally breaks out above the 50-day MA and closes there, it signals the start of the next leg up. That’s the moment to strike.
Let’s break it down using a real example I discussed one day in my VIP Trade Room: eBay (EBAY).
The stock had just crossed above its 50-day MA after weeks of consolidation. It’s a textbook case of this pattern. The breakout above the 50-day MA is your signal — not the earlier chop or the initial pullback.
If you’re disciplined enough to wait, this entry point offers a high probability of success with the potential for strong, sustained momentum.
Here’s why this setup works so well:
- Consolidation builds strength. A stock that compresses after a strong move is shaking out weaker hands while institutions accumulate. This sets the stage for the next rally.
- The breakout confirms momentum. By waiting for the close above the 50-day moving average, you avoid false signals and focus only on high-probability trades.
- Timing is critical. Buying during the consolidation phase is tempting, but the real edge comes from waiting for that clear breakout.
This pattern isn’t just about watching moving averages. It’s about understanding market psychology. After a strong rally, stocks need time to cool off — just like runners need to catch their breath after a sprint.
When the consolidation ends, it’s a sign the stock is ready for its next move.
I’ve seen this behavior time and again across sectors, from Technology (XLK) to Health Care (XLC). And while it’s not quantifiable in the sense of a strict formula, experience proves it works.
So next time you spot a stock compressing between its 50- and 100-day MAs, pay attention. Watch for that breakout above the 50-day. And when it comes — be ready to act.
That’s the kind of edge swing traders live for.
I hope that helps!
No comments:
Post a Comment