JD Stock: When Patterns Fail
I have always been a big proponent of using technical signals to accompany a trading strategy. My articles usually outline signals and potential setups, but I have yet to outline what happens when these signals fail. Luckily I stumbled upon JD.com Inc. (ADR) (NASDAQ:JD) stock, which is a great example to use. Failed patterns are also signals. I am always on the lookout for failed patterns because these signals are powerful. Not only do they signal that a trader should exit one’s current position, but they also signal that the trader should quickly reverse one’s position in order to profit from the change in tide.
Since the company first went public, JD stock has found support near one key price support over and over again. $22.00 is the price point where bulls and bears have met on numerous occasions Traders have been eyeing this level to act. Whether to add to long positions, exit long positions, or enter short positions. $22.00 was the focus of many.
The following chart illustrates the bearish chart pattern that was setting up.
Chart courtesy of StockCharts.com
The chart above is classic example of a “descending triangle”. Statistically, these triangles are seen in a bearish light based on the trading action. Each and every time JD stock approaches support at $22.00, buyers appear to support the price. Each subsequent rally ends at a lower high as sellers are more willing to exit positions at a lower price. On average, these patterns break down, but that is not always the case. Descending triangle patterns often have five points of contact before the pattern breaks into either an upward or downward direction.
JD stock completed these five points of contact and broke out to the downside. The price objective of this breakdown is a ridiculous $0.00. The next six to seven weeks of trading action left ample time for traders to assume bearish positions in anticipation of a follow-through to the downside.
In early August, the bears were caught when shares were unable to follow through on the downside. A price spike occurred and shares traded back above $22.00. This price action may have left many bearish traders exposed. These traders will have to cover their positions, and the bullish traders that exited on a break below $22.00 may now wish to re-enter the trade. When both camps are caught off guard, they tend to panic and chase the share price higher. Failed chart patterns are extremely explosive for this reason.
We can expect the resistance line to be tested once again. But given the new information that the breakdown failed, this information leads us to speculate that the resistance level has an increased chance of being broken to the upside.
A break above the resistance line on the triangle would target the previous all-time high at $38.00. This would also end the streak of lower highs that defined the triangle. If this is indeed a failed pattern, the implications for new all-time highs are real and plausible.
The Bottom Line on JD Stock
Failed patterns are signals, and very powerful ones. Many traders focus on these patterns because they can prove to be very profitable as many find themselves caught off guard and are chasing price to either exit or reverse the trade. JD stock has failed to follow through on bearish pattern, and this leads me to believe that higher prices will follow.