The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

10 August 2006

Base... or top?

While this pattern (one limned recently) might appear, at first glance, [to be] a base...

... it is anything but a base; in fact, odds are excellent it is a top. (btw, the company name matters not at all for the purposes of this post.)

[click on each image to enlarge]

NB the following subtle clues:
Area #1) The presumptive base...
Area #2) That follows the aborted prior base -- aborted by insufficient time, even though the share price went higher;
Area #3) The extraordinarily weak rally in price, accompanied by insufficient volume (price:volume relationship). That final rally proves so weak that it too quickly exhausted itself after only marginally higher highs and too few days of up trend.
#4) Note the abundance - nay, the preponderance - of reversal bars (highlighted) within the presumed base; way too many! In fact, the reversal bars populate this chart prior to the final push to new highs.
#5) Note the 2:1 split (highlighted) that follows 3:1 split (not shown, but just off the left margin). Share splits that occur too regularly, or greater than 3:1 are anecdotal evidence of an imminent end of prevailing trend.
#6) This particular stock has rallied to ~$45+ from ~$1.50 in ~5 years. Wow!

The market's leaders, even the strongest of the strong, require a breather every now & then, if for no better reason than to test the resolve of the bulls. It seems such will be the case soon for this company's stock. Lower prices ahead.

-- David M Gordon / The Deipnosophist

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