Large profits are made when we identify existing trends ….

Large profits are made when we identify existing trends ....

Large profits are made when we identify existing trends and correctly predict when that trend will change. An example can be found by studying the chart of Research in Motion (RIMM). RIMM bottomed in December and the started a sporadic rally which created a fan pattern. A fan pattern exists by drawing three trendlines from the initial starting point. In the case of RIMM, the fan was an uptrend.

Large profits are made when we identify existing trends and correctly predict when that trend will change. An example can be found by studying the chart of Research in Motion (RIMM). RIMM bottomed in December and the started a sporadic rally which created a fan pattern. A fan pattern exists by drawing three trendlines from the initial starting point. In the case of RIMM, the fan was an uptrend.

The initial rally (line A) was broken on heavy volume and resulted in a retracement of over $20. When the stock successfully tested its low in March, the second trendline (Line B) became more prominent. With little variation, Line B has taken prices to the recent high of $85.
When this trendline was broken on June 15, it indicated prices would move lower and they have. After an uninspiring earnings announcement, RIMM surrounded over $15 from its recent high.
With that damage, we now see the final uptrend (Line C) has been violated. With a fan, when the final trendline is violated it indicates that the underlying trend has changed. For RIMM, it indicates that the long-term bullish pattern has now turned bearish.

Tuesday RIMM attempted to bounce above this trend, but failed. Given the failure, the odds have increased that RIMM will fall toward its support level of $58 over the coming weeks.

Adding to the likelihood of lower prices is that volume swelled on recent down days, but remained low on today’s rally (green box). Changes in volume reinforce price movements. In this case, the surge in volume on down days indicates that more conviction is behind moves lower.

As with all stocks that show quick price moves in either direction, the question becomes whether the recent decline is the extent of the damage or if more trouble lies ahead. Until prices move convincingly above line C, the likelihood is for RIMM to move lower over coming days. 

Sean Hannon, CFA, CFP, is the publisher of EPIC Insights, a weekly newsletter providing Sean?s timely stock ideas and market commentary. Sean?s goal in EPIC Insights is to educate readers, giving them accessible advice they can use to manage their own financial future. The transparent portfolio that Sean has created in EPIC Insights has outperformed the S&P 500 during many investment cycles. Through this portfolio Sean offers readers a thorough... More