To The Gurus: Woof Woof!

You probably have a go-to setup that seems to work better than any other for you. My favorite pattern was something developed by technician Andrew Cardwell and later discussed in detail by Connie Brown in her book. It is the RSI 14 positive divergence.

Years ago when studying RSI, Cardwell noticed that sometimes during a pullback in an uptrend, price pulls back a bit while RSI pulls back even a little farther. When this pattern sets up, price doesn’t undercut its previous low while RSI does. Cardwell argued that this indicates internal strength in the stock because price is resisting the downtrend even as RSI goes lower. He called this pattern ‘positive divergence,’ and argued that it is most useful when it occurs within 5 periods of the initial low.

I use this pattern on weekly charts of high momentum stocks. The MACD of the stock should be in an uptrend, and price should be holding at or above the 20 ema. LVS provided a perfect setup in the spring that was worth almost 15 points of profit. (All of the following information is taken from the weekly chart.) On 2/10/06 LVS closed down at 47.41 with RSI 14 at 61.38. Exactly five bars later on 3/17/06 LVS closed down at 49.25. This close was higher than the 2/10/06 close, yet the RSI 14 closed lower at 59.49. This is a positive reversal, indicating internal strength in the price.

Cardwell developed a measuring system for projecting a minimum upside target for the stock. Take the difference in the two closing lows and add it to the highest price made on the last up move. This gives us a minimum target of around 60. So the next week, on a break above 53.10, the high of the week of 3/17/06, I bought, looking for a minimum target of 60. LVS followed through with 4 weeks of perfect price action taking it up to 64.46. The fifth week brought a narrow range bar with a slight closing price reversal. I almost bailed, but decided to let the stock rest a little, and set a stop of 60. This kept me in for a few more weeks. The week of 5/12/06 LVS had another closing price reversal with a wider range bar, and that was my signal to bail. I moved my stop to the low of that week which was 67.70, and got stopped out the following week for just over 14 points of profit. And, again, I bow to the gurus of technical analysis who keep putting money in my pocket. Thankyouverymuch!!