It All Depends on How You Draw the Lines...

I showed the following chart to the folks who participated in my breakout session at the Agora Wealth Symposium back on July 27th:

 

 

 

I suggested that this chart of contract oil driller Baker Hughes (BHI) was a bearish pattern - and the stock was likely to break to the downside. In fact, I told the crowd that shorting BHI was one of the “five best trades to make today.”

 

After the seminar, one of the participants approached me with a reasonable question…

 

“What if I draw the lines like this?” He asked. Then he showed me this chart…

 

 

 

“Doesn’t that make it look bullish?” he asked.

 

I agreed. I told him that’s what creates differences of opinion among technical analysts. It all depends on where you draw the lines.

 

His next question was obvious, “How do you know where to draw the lines?”

 

I was stumped. I didn’t know how to respond except to say that it was kind of like defining art. I can’t tell you exactly what makes good art, but I know what I like. Similarly, I can’t explain why I draw the lines the way I do but I know how they’re supposed to look.

 

Here’s what eventually happened to BHI…

 

 

 

I’ve been studying charts for over twenty years. In fact, every Saturday morning I go through the same routine… Get up insanely early. Prepare an insanely large pot of coffee. Review an insane number of stock charts. Take note of the charts that look similar and watch how those stocks perform over the following week. Repeat.

 

It’s a laborious process. But getting my hands dirty and looking at hundreds of charts is the best way I know to generate successful trading ideas. When multiple stock patterns unfold in a similar manner, the odds are excellent that future stocks exhibiting the same pattern will unfold in the same manner.

 

That’s what concerns me so much about the multiple bearish rising wedge formations I wrote about last week. And, it’s why I think investors should be very careful about where they put their money right now.

 

Best Regards & Good Trading,

 

Jeff Clark

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