#10 on our list is Proshares Clean Energy Fund which holds roughly 50 different clean energy related stocks. I have written previously about this Fund in detail that you can find in the post archives; if you want more information about this, feel free to check out that earlier post. Today I am going to talk specifically about the technical picture and what has developed since our first post.
Since breaking above long-term downtrend resistance back in early December 2012, price has rallied up to test the most recent high at $4.50. We want confirmation that this trend is reversing and taking out that prior high will be a key step in that process. When a stock is in a down trend (lower highs/ lower lows) we want to see the stock move above the prior high to break the pattern of lower highs. That is the first step.
Next we want to see some bullish price action develop as we approach those previous highs indicating that we still have enough strength to break through the resistance level.
What I have been noticing over the past 2 weeks is that since moving from a low of $3.46 to a high of $4.48, price has consolidated into a very positive pattern known as a Bull Flag or Bull Pennant. Typically with a flag type pattern price will rally strongly then move in a narrow trading range for a period of time. Then the trading range will narrow considerably before breaking out hard in the same direction as the current pattern trend. A Bull Flag is known as a continuation pattern as it indicates price is just taking a breather after a sharp up move before continuing higher. This is positive action.
Price consolidation is a huge part of technical analysis. There are a few general rules:
1. After a strong up or down move, the short term trading range will narrow as traders take profits and others who missed the rally look for a pullback to enter the stock.
2. From tight consolidation comes expansion. Price tends to tighten and expand in a trend, and this is something we always watch for around these tightening areas.
3. Typically you like to see the trading volume decrease as price consolidates. This indicates that the sellers are not aggressively dumping shares and that a more orderly profit taking is under way.
4. We need to see the trading volume expand once the consolidation breaks out. Its important for the pattern probability to see lots of buying interest once the pattern begins to break the tight range.
The next thing I notice here is that the price has held above its 200 day moving average (the dark blue line). This represents the average price over the past 200 trading days and is a strong area of resistance/support. The fact that it has held above during this consolidation is very positive for the stock.
Lastly and one of my key indicators I use for short term trades is that we are seeing the 20 day average (green line) uptrending and above the 50 day average (red line) which is also uptrending. What this tells me is that both the short term (20 average) and the intermediate term (50 average) are both trending in a positive direction. I have found that your probability for success in a trade is greatly increased when these two averages are showing this positive trending action.
As for my recommendation of what to do here is I am looking just a couple more days at the most of consolidation before this continues its rally higher. I will be looking to add to my current holdings once this touches the 20 day moving average. That I believe will be the end of the tightening and hopefully will lead to a price expansion in a positive direction. Bottom line is everything is shaping up here for higher prices and this fund seems to be a good value with all the correct momentum in place to move higher.
If this in fact moves against our plans (which can often happen) I will be looking to exit this trade if it breaks below the rising 50 day moving average (red line). Remember a small loss is much better than a big one! Never let a trade get away from you and always have a point (a Stop-loss) where the market will prove your thesis wrong. For me, my plan would be proven wrong with a breakdown of the rising 50 day average. That would mean that the 200 day average would fail, the 20 average would fail, the prior consolidation area (near $4.10) would fail to hold as support and finally the 50 average would fail...I would say those all together would make me think I was wrong.
Good trading!
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