That may sound strange coming from someone who shorts more often than buys, but history has shown us that charts are fantastic at illustrating investor sentiment. History also demonstrates that when emotions are high, the market often misprices companies.
When I wrote Yes, BlackBerry Is a Buy, I was motivated by the valuation potential, but the chart formations provide timing. I use a custom variant of Tom DeMark indicators as one my primary tools to time entries and exits. DeMark wrote several books, including one of my favorites, New Market Timing Techniques.
On any given day, emotion is the primary driver of price action. Over the long term, however, a company's fundamentals dictate valuation. For example, on Tuesday this week, BlackBerry shares closed at $9.93, and on Wednesday, they closed near $10.75, a change of 8%. The plant, offices, inventory and other assets didn't increase in value, at least not as much as 8%, but investor sentiment clearly shifted.
We can measure the degree of emotions and reactions using charts. Certain chart patterns have incredibly high percentages of predictability. We don't necessarily need a high percentage of expectation; we need only enough to provide a reasonable edge.
Courtesy of Tradestation
During the week ended Nov. 15, BlackBerry completed a TDCombo buy setup at the point of the 13 on the above chart. (I placed a red circle around the bar.) If you've never heard of a TDCombo before, today is your lucky day because it's one of the most respected technical indicators used by large funds. A Google (GOOG) search or the book mentioned above will set you in the right direction.
For now, know that the "13" indicates a market that maybe is reaching an exhaustion point. In other words, the weak hands have thrown in the towel, the shorts have pushed the share price about as low as they dare and value buyers are increasingly interested.
Sure enough, within four bars, the price bottomed and reversed. Short sellers were ducking for cover also. You can see how short interest imploded during the same period.
We are now 10 bars later, and the shares have rocketed from $6.43 a share to $10.78 at Wednesday's close. If we look at the high of the starting point of the setup, occurring on the bar with the white number four label, we can gain a profit target to aim for. Based on the chart, we should expect the next significant resistance level near $15 a share.
Before we double up and start thinking about what we're going to buy with our gains as we travel toward $15, we need to take a look at the daily chart. You will notice another 13, but in this case it's on top of the bar instead of on the bottom.
Courtesy of Tradestation
On Wednesday, BlackBerry reached a level on the daily chart that suggests the amount of buying pressure has reached a short-term limit. In a similar fashion as the weekly chart, the daily chart may simply continue higher before reaching exhaustion.
Also, on Tuesday, the chart gapped up after a strong move higher. On Wednesday, the chart did the same, resulting in three strong days in a row, or what I call a gap +1. One more day higher and we have a gap +2, and I will almost always short a TD13 combined with a gap + 2 into the close.
What this means is you should expect short-term weakness that may set up a buying opportunity if you're a buy-and-hold investor. If you're an experienced active trader, you can short the pattern and use a price dip as a short cover and buy entry.
At the time of publication, Weinstein had no positions in securities mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.