Free Stock Chart Patterns
The Hook Punch is a stock chart pattern label I have created. This pattern can often be seen after a significant downward move.
What happens is that after having a big downward move, the stock switches into a downtrend channel.
After usually 2 to 3 bounces up against the downtrend channel wall, the stock does a breakout move. After having a short rally, the stock then does a 38.2% to 50% Fibonacci retracement. It might begin an uptrend channel.
The pattern resembles a huge hook with the punch being the breakout from the downtrend channel.
Traders can enter a long on the downtrend channel breakout, or perhaps a great bounce off a 38.2% to 50% retracement.
There is more variation with this pattern than of most stock chart patterns I have seen which is why more traders have not seen this before and I am left to invent the pattern myself. Because of this high variation, it is vital that you understand the psychology behind the pattern so that you can separate out the noise.
A huge drop is the very first stage within the Hook Punch. Increasingly more stock traders panic and go to the exits or simply determine that now is the time to book gains. This brings about a short sharp decline. As panic traders and profit takers exit the stock, more rational short sellers dominate. That brings about a far more organized downtrend channel. Usually the life cycle with the downtrend channel is three to five bounces within the channel. When the life cycle of the downtrend channel wraps up, bulls just are not able to pass up the ridiculous bargain at this low level. The stock moves up and once it breaks the downtrend channel wall, short sellers race for the exit and take profits. That translates into the punch move through the downtrend channel wall. After the panic short covering and short profit takers leave the stock, an insufficient number of buyers are prepared to pursue the stock on the spike breakout. Loads of buyers lament that they didn't buy earlier and vow to go in the stock if it pulls back enough. A Fibonacci retracement generally between 38.2% and 50% takes place. Buyers who missed buying the first low jump in since the stock is no longer overbought short term. That buying forms a higher low on the chart and the stock is then liberated to move higher.
Keep in mind the Hook Punch may also result in a mug punch to bulls with a move down following the Fibonacci rebound.
Within the short movie below, I demonstrate a recent Hook Punch that formed within the Nasdaq.
Article Source: FxTradingStock.com
About the Author
Discover the secret to out trade and win the majority of other investors in the stock market. Visit free stock chart patterns
by: Michael Scott
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Date: Thu, 26 Aug 2010
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