Free Chart of the Week — Expedia (EXPE)

by DAN Tracking price patterns can be very effective in gauging the strength of a trend, or for developing a thesis for future price action.  In essence, we want to use the recent price movement to build a roadmap for interpreting future price movement — will an advance in price attract more buyersor will it flush out sellers?

Lots of folks seem to think that spotting a price pattern entitles them to profit from that pattern.  That’s simply not true — because lots of patterns fail.  Breakouts from continuation patterns wind up failing; a bearish head and shoulder reversal pattern leads to a new all-time high. 

The more effective way to deal with patterns is to take a failed pattern in stride and consider the implications of that failed pattern.  One example of a failed pattern is EXPE–which recently formed an “island reversal”.  Let’s take a look.

 
An “island reversal” pattern is almost self-explanatory.  The price gaps up significantly and then trades sideways for a while before it gaps back down to trade at the same pre-gap level.  This pattern typically occurs in response to some type of news event that creates a huge swing in buying/selling sentiment.  But the resolution of that pattern — a return to the pre-gap level — leaves lots of traders sitting with big losses.  They gradually succumb to the losses and their selling keeps the stock down.

This hasn’t happened with Expedia (EXPE).  We can see how the stock gapped up from $26.50 to $30 back in June.  It than gapped back down in mid-July.  But since that time, the stock has slowly been chewing its way up to the level of the gap — $30.  This indicates that all those regretful buyers who own the stock from around $29 or $30 are no longer leaning on the stock.  Instead, the new demand for the stock is steadily overwhelming the selling pressure.

The trade is to buy on a move above $30.  In that event, we’ve got a failed island reversal pattern leading to a higher high.  And the only way that can happen is if there is strong buying interest in the stock.  In that case, you want to be long!

If you’ve got any questions about this trade, feel free to contact me.  Also, if you’re interested in attending a one-day workshop, check this page for details.

Dan Fitzpatrick
www.stockmarketmentor.com
Dan@StockMarketMentor.com

Free Chart