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TECHNICAL ANALYSIS


TWM Hits Price Target

06/01/10 12:06:00 PM
by Alan R. Northam

After hitting the median line of the Andrews pitchfork and forming a closing price reversal bar but not hitting an expected price target, the trader may consider the move over. However, by proper analysis of the market in question, it can be shown whether a high probability still exists for that market to still hit its price target.

Security:   TWM
Position:   N/A

In my previous article entitled "TWM Hits Median Line, So What Next?" I showed that the Russell 2000 Inverse ETF (TWM) had hit the median line of the Andrews pitchfork but failed to hit its initial price target. I further discussed if the trader should expect TWM to reverse back downward after hitting the median line of the pitchfork or continue higher and hit the given price target. I then gave evidence that proved that TWM should continue higher in the days ahead toward hitting the initial target of $23.27. However, I also gave evidence that TWM had just formed a one-day reversal bar and that we should expect TWM to correct downward for a day or two before continuing higher to hit its target price. See Figure 1.

FIGURE 1: TWM, DAILY. Here's the price target for the trade.
Graphic provided by: MetaStock.
 
As it turned out, the analysis was spot on. Following the closing price reversal bar on May 21, the following day turned out to be an inside day. An inside day is a day in which the price bar makes a lower high than the previous bar and a higher low. Inside days are considered to be days of indecision when buyers and sellers cannot decide whether to buy the market higher or sell the market off, driving it lower. There is a fine line between inside days, consolidation days, and short-term corrections. While each are technically different, they all act similarly and it can be debated as to which it is. I have marked it as a one-day correction for the following reason.

According to Elliott wave theory, wave 4 represents a market correction. Wave 4 also occurs closer to the end of a trend and not the beginning. Since the short-term trend was six days old, I considered the inside day on May 21 to be closer to the end of a short-term uptrend than the beginning. (Note: Short-term trends last from a few days to a few weeks.) Further, wave 4 typically moves sideways, making little progress upward. The inside day on May 21 did make some upward progress but not much.

Following the one-day market correction, TWM continued to move higher as expected, hitting the initial price target of 23.27 during the session. The trader who had an order placed with his or her broker to exit the trade once the target price was hit would have gotten out of the trade once the target price was hit during the session. Traders who did not have such an order in place with his or her broker would now be faced with a new decision: "Should I continue to hold hoping for another chance at getting out at the target price or should I exit the trade with a smaller profit?" The best thing to have done would not to have been placed in a position of having to make these kinds of decisions so you would not be faced with making this decision, had an order been placed with a broker to exit the trade once the target price was hit. However, once a trader finds him- or herself in such a position, the proper decision to stay with the trade or exit for a smaller profit can be wisely made by further analysis of the prevailing trend, momentum, volatility, and volume.




Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.

Garland, Tx
Website: www.tradersclassroom.com
E-mail address: inquiry@tradersclassroom.com

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