Blackrock (BLK) setup what Trader Vic would term as a 1-2-3 setup or a Dow Theory confirmation of a trend change.
As you can see:
- BLK broke the up-trend after establishing a new 52-week high above $242.
- From there, it consolidated and formed what is referred to as the minor sell-off.
- Prices stared to rise but failed to make another new high. This test of the previous high failed near point number 2.
- A failure to make a new high is usually (not always) a signal that the trend is about to change.
- Finally, we reach point number 3 where prices went below the previous short term minor sell-off (this is trend reversal and the signal to short). If missed, you can short on the first failure to recover the major moving averages (or #3 area).
In addition to the 1-2-3 setup, the stock has also allowed its 10-week moving average to cross below the 30-week moving average with typically signals a change in trend when both lines are starting to point down.
Victor Sperandeo says this about the 1-2-3 setup:
At the point where all three of these events have occurred graphically, there exists the equivalent of a Dow Theory confirmation of a trend change. Either of the first two conditions alone is evidence of a probable change in trend. Two out of three increases the probability of a change in trend. And three out of three defines a change in trend.
Take a look at the picture I scanned from Sperandeo’s book on page 76:
This is essentially the pattern I am watching for in several of the stocks starting to churn (run out of steam) that I posted to my twitter stream. However, have patience and be prepared to sit on the sidelines for a while as this pattern takes time to build and then confirm (nearly four months for BLK).
Twitter stream for 5/17/10 (stocks down on heavy volume, trading near 30-wk): $PCLN, $GMCR, $V, $MA, $TCK, $BUCY, $BTU, $MR
Recent Tweets on BLK:
- 7:33 PM Apr 6th via web: $BLK – 198.55, clearly falling apart (but gap down has to fill before ultimate slide).
- 10:02 PM May 5th via web: $BLK…Trading @ 174.80 & going down!
This is a game of odds with developed expectancies so take the trades and follow the rules.
Good call there. Where would you target on the downside?
Trader Vic had some great ideas- the 123 is a good pattern, as is the 2B reversal (failed breakout and reversal). They work in the futures markets as well as equities.
Chris, excellent chart. What do you think about Netflix. They remind me of DRYS and and run the dry shippers had in 2007. And they have the IBD kiss of death by being in the top 100 too long. Time to short? Thanks! I saved myself a lot of heartache and put my 401K in bonds 2 weeks before this correction due to too many distribution days in the NYSE and other indexes. Saved me big time! Thanks again.
Chris,
Great post, was actually just reading this section of Trader Vic’s book last week for a refresher.
Just wanted to add that Vic refers to this sort of trend change pattern as “the equivalent of a Dow Theory confirmation of a change in trend”.
So, just clarifying to let people know that this single stock analysis is not a part of Dow Theory itself, which (of course) pertains strictly to the
Dow Industrials and Dow Transports. There is often a lot of confusion about Dow Theory and I tend to forget some important points sometimes myself!
David Trader Vic wrote another book that most have never heard about.
More about the economy and Fed: http://www.chrisperruna.com/2007/09/21/crashmaker-a-federal-affaire/
I admit, I haven’t read either, just the web page from Sperandeo but it’s on my list (looking to find from library somewhere). Not in NY Public Library system.