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Time Warner A Solid Buy Setup?

11/09/11 11:34:39 AM
by Donald W. Pendergast, Jr.

After a pullback to key moving average support, shares of Time Warner may be poised for another swing higher.

Security:   TWX
Position:   Buy

There are few trading methods better than that of using a proven mechanical system along with time-tested chart pattern recognition. We'll look at a simple yet potentially powerful chart pattern that has formed even as a powerful trading system has fired a buy signal.

FIGURE 1: TWX, DAILY. Pullbacks to the 50-period moving average (or its exponential counterpart) frequently result in a continuation of the original uptrend, frequently offering a new opportunity to jump in on the long side again.
Graphic provided by: MetaStock.
Graphic provided by: RMO indicators and tools from MetaStock 11.
In Figure 1, a daily chart for Time Warner (TWX), we see the late summer trading range (pink shaded area) followed by a powerful breakout move that took the stock up to as much as $36 by October 27, 2011. After that swing high was made, TWX made a proportional pullback, testing support at its upsloping 50-period exponential moving average (EMA), reversing sharply higher after it did so. At the same time, the long-term money flow was well above its zero line, indicating strong demand for the stock. Money flow is still very strong, and now that the Rahul Mohindar (RMO) trading system, which indicates long-term trends, has fired a new swing buy signal, this looks to be an all-systems-go kind of trade setup.

Here's what you want to see for this kind of continuation move setup:

1. A successful, powerful breakout from a significant range that has multiple tests of support (as in the pink area on this particular chart), followed by
2. A pullback to an upsloping 50-period EMA, followed by
3. A strong reversal higher, one in conjunction with a new mechanical buy signal from a proven system.

As always, both long- and short-term money flows should be well above their respective zero lines when going long such a setup; having both in a bullish posture may help increase the odds of success on the trade.

Managing a long trade like this can be as simple as running a two- to three-bar trailing stop of the daily lows until the final stopout. This kind of trailing stop is objective and will usually keep the damage to your account to a minimum if things don't go exactly as planned. The big idea is to keep the risk to your account at no more than 1% to 2%, depending on your level of trading experience and risk tolerance. Try this kind of stop if you're planning to do some swing trading and you may be pleasantly surprised at how well it works in letting profits run while keeping losses small -- in most cases.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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