Turn Chart Patterns Into Action

I've been receiving lots of requests for my take on certain stocks. As I review the various charts, I notice that virtually all of them have one thing in common: an identifiable price pattern that's likely to help us forecast the next probable direction in price. But until the pattern is either completed or broken, the next direction is still up in the air.

Today, let's look at five charts that show identifiable patterns: triangles, flags, channels, double tops and double bottoms. All of these charts are close to either completing or breaking the pattern. Only when the pattern is completed or broken should we take action. Until then, you're simply gambling.

Schnitzer Steel

I've highlighted the ascending triangle in Schnitzer Steel (SCHN - commentary - Cramer's Take) with black lines. An upside breakout back in March would have started the next leg higher. But as I wrote in a column earlier this month, a broken pattern can be just as tradeable as a completed one. Since the pattern break, the stock has declined another $10.

Now, though, another pattern is being formed: a double bottom. If I were long, I'd stay that way unless support breaks down. In that event, the next likely level of support is clear down to $15.

Wynn Resorts

Wynn Resorts (WYNN - commentary - Cramer's Take) had been a loser from March to May. But the higher low established in late May set the stage for the recent uptrend. Over the past couple of weeks, Wynn has been in a consolidation range. After a 25% advance, I view this current flag pattern as a continuation pattern rather than a reversal. Still, I'd protect any existing long positions with a stop at around $51 and would be a buyer at $56.

UnitedHealth

UnitedHealth (UNH - commentary - Cramer's Take) had been meeting strong resistance just beneath $50. But enough demand for the stock finally chewed through supply, and UnitedHealth advanced about $2 before the supply/demand balance was equalized again.

Now, we really don't know whether this tight flag pattern will lead to an upside breakout or a reversal. That is why I'd be on the sidelines now. Just wait for the price movement to dictate the appropriate (profitable) action. If the stock drops beneath current support, I'd wait to see whether the buyers who missed the opportunity to buy last time rush to take advantage of this second chance (i.e., prior resistance now becomes support). But if no demand materializes, you know that the breakout was a fake-out and you just don't want to hold this stock. That's why I've placed a stop just beneath prior resistance.

Doral Financial

Over the past few weeks, Doral Financial (DRL - commentary - Cramer's Take) has been recovering from a really vicious decline. Look how long RSI (relative strength) has been oversold -- it's been months. This chart is an excellent example of how a stock can become oversold and just keep going down. That's why the idea of buying a stock merely because it's oversold seems about as appealing as trying to catch a falling chainsaw.

So what's the next move? It looks to me like Doral is hitting some significant resistance at around $14. This is the same level from which the stock broke down in a very tight volatility squeeze last month. So a break above the resistance line drawn on the chart confirms that the late-May dip below $10 is the bottom. But until resistance fails to hold, I'd be on the sidelines.

Syneron Medical

This weekly chart shows Syneron Medical (ELOS - commentary - Cramer's Take) since it began trading. During the past seven months, the stock has been trading within a wide price range. But unless you are trading the shorter-term oscillators, the stock has essentially been dead money since the November high. But during the last six weeks or so, Syneron Medical appears to be catching some bids, forming a series of higher lows. I'd certainly sell if the support line was broken, but I wouldn't be a buyer until Syneron Medical hits a new high. Until then, I consider it stuck in a trading range.

Be careful out there.

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Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick is a member of the Market Technicians Association and manages The Stock Market Mentor, a Web site focusing on the proper use of technical analysis for trading and investing. At time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, He appreciates your feedback; click here to send him an email.