|Last autumn, Network Appliance Inc. formed a bottoming pattern via a descending triangle. This pattern was confirmed valid as the stock continued higher on this daily chart (Figure 1). Two moving averages helped define this rise.|
|Once a stock rises above its 200-period moving average, many traders consider that a trend change is under way, at least in that time frame. Here, we see how well the combination of the 20-day exponential moving average (EMA) and the 200-day EMA held support for the last four months. Once the 200-day EMA was breached, note how the rise was held intact by 20-day EMA support. A swing trading system called the "holy grail" (from the book StreetSmarts by Linda Rashke and Larry Connors) can be applied here. Basically, when a stock is enjoying a strong rise, it is often supported by this moving average. Buy signals are generated as the stock bounces off this moving average. Some traders consider the trend to be over when the stock closes below this MA. Note how the next upleg was launched by a bounce off the 200-day EMA. Now once again we see another "grail" move off the 20-day EMA appearing with Friday's close.|
|FIGURE 1: NETWORK APPLIANCE, DAILY. Here's a healthy uptrend after a bottoming pattern.|
|Graphic provided by: StockCharts.com.|
|Several indicators also point to continued bullishness.|
The directional movement indicator at the top of the chart shows a strong uptrend in place via a rising average directional movement index (ADX) above 25. The lower indicators (moving average convergence/ divergence, relative strength index, and stochastics) all reflect a beginning upturn near their 50 levels. This often points to a bounce in the making.
|Traders who are playing this latest grail move can elect to stay with this rise until the trend is broken with a close below the 20-day EMA. Mind you, a candlestick reversal pattern after an outlandish rise would also be a tempting sell point. Which will appear first? Only the market knows for sure.|
Click here for more information about our publications!