|TravelZoo (TZOO) experienced a powerful breakout on July 18 (yellow area, Figure 1) from a small cup & handle that looked to be contained within a larger pattern. But then after putting in a doji candle on July 19, the stock experienced some serious selling pressure on July 20, and in the process posted an engulfing bear candlestick pattern. Although not as ugly as the one seen on April 26, the action on July 21 showed why the pattern should not be ignored. It also highlighted the risks of holding through an earnings report.|
|FIGURE 1: TZOO, DAILY. TravelZoo shows the small cup & handle breakout that occurred on July 18. Volume holds the key and as we see, the selling volume was contained on July 20, but then exploded with the earnings missed on July 21.|
|Graphic provided by: FreeStockCharts.com.|
|The cup & handle pattern is one of Zanger's million-dollar patterns; it has helped him make millions trading. See a more detailed discussion of this (and other) patterns at http://www.chartpattern.com/cup_handle.html.|
This TZOO pattern was profitable, but we can see why it can be costly to overstay your welcome in a trade.
|TZOO reported earnings of 30 cents a share on Thursday, July 21, but this was well off the average analyst estimate of 39 cents, and the stock crumpled 27% in the morning of the release as selling exploded. The stock also had short interest of 3.58 million shares as of June 30, which is the highest short position in more than a year. A rally could have created a powerful short squeeze, but instead, the shorts took control in the selling melee.|
Those who took profit after the breakout on the doji (July 19) or the engulfing bear the next day made money. Those who didn't exit lost big time, proving once again why this is no market in which to overstay your welcome.
|Dan Zanger, author of The Zanger Report daily newsletter, is a high-octane trader who continually hunts for big moving stocks but as soon as the move starts to slow, he begins selling, often exiting altogether before his stop-loss is triggered. He refers to this process of selling into declining momentum as "feathering out." Zanger says it's simply a matter of tracking volume pressure -- if a stock shows decreasing upward price movement on increasing volume, buying volume is fading and selling volume picking up.|
|Earnings reporting periods can be a dangerous time for traders to be in stocks. According to Zanger, "Reducing your positions dramatically or being out of a stock altogether before earnings is one of my 10 golden stock trading rules."|
Zanger described how he locates tradable patterns and uses volume to confirm his buying and selling decisions in more detail in the first interview I did with him in the August 2003 issue of STOCKS & COMMODITIES entitled "Chart Patterns, Trading, And Dan Zanger." It is available to S&C subscribers at http://technical.traders.com/archive/article.asp?file=\V21\C08\180ZANG.pdf.
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