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I've mentioned Travelcenters of America (TA) many times recently, the earliest of which was, I think, this post of August 28th. This stock has soared over 100% in just seven trading sessions. What made this stock such a great example of technical analysis in action?
I think several things come into play, if we look at the late August/early September action:
Very clean correlation of volume to price action; as the price plunged and based, the volume dropped and got stagnant. Much later, when the price started to firm up, the volume started to rise very handsomely, as indicated by the volume graph below.
A very clean saucer pattern; if I believed we were at the start of a bull market, I would be turning over every rock that I could to find these, because they are my favorite bullish pattern. Even in this weird market we're in now, this pattern was worth noticing.
A perfect breakout, retracement, and then resumption – – meaning that a purchase at the retracement represented an extremely appearing risk/reward ratio.
Congratulations to everyone who has profited from this stock. It's a beauty. As an aside, I would mention that PCX recently broke out too, although I don't think the pattern is as sensational as this one was.
The Russell 2000 – like so many indexes – is all the way back up to its 50% retracement level. Let's take a look, below, and take note of the tinted area particularly:
As you can see, the Russell's fall in early October 2008 was very fast. It dropped 25% in just four trading sessions. (Excuse me a moment while I dab a tear from my eye.……..) It cut through the blue tinted area in just a couple of days.
People understand that markets can fall swiftly. In the case of a lot of indexes, there's a very substantial "air pocket" like the one you see tinted here.
What's puzzling to me is that people assume that there will be a Melt Up in such an air pocket, just like there are Melt Downs in areas with little support.
I'm afraid people are applying the laws of physics to the laws of technical analysis/psychology, and I don't think it works that way.
Let's say you were trying to assess how easily a spacecraft could move through the atmosphere. And let's go on to say that, for whatever reason, the area between 10 miles and 15 miles in the atmosphere was an empty vacuum (OK, go with me on this……..)
The spacecraft, pushing hard against all the air for the first ten miles of the journey upward, would fly dramatically faster during that five miles of emptiness. So the emptiness would make going up easier. By the same token, on its return journey to Earth, as it descends to the 15 mile mark, it would likewise move very quickly (and dangerously………..) through the five miles of curious emptiness which my little example has provided.
That works with friction, but it doesn't work with people. The reason markets fall swiftly with there is very little support is because there is a huge mass of people who, when suddenly confronted with a position in the red, want to get the hell out. There simply aren't any owners at those lower levels to prop things up. The Russell, in this example, collapsed swiftly because there had been no buyers at those levels for years, and the overwhelming majority of money was invested at higher prices. People don't like losses, so they sold quickly.
But it doesn't work like that in the other direction. It's not like those who have been buying at lower levels notice the mass of owners at higher prices and make it their life's mission to get prices back up that level for the greater good. Yes, prices MIGHT climb through the air pocket, but they do not do so BECAUSE of the air pocket. I would hasten to add that, once the air pocket is filled, you have a mountain of overhead supply.
Anyway, that's all for me today, I think. I'm just weary of reading about how "there's nothing but air" for the next couple hundred points on the S&P, and thus it is a foregone conclusion that it will be filled. Maybe it will, maybe it won't; but it won't get filled simply based on the fact that there's empty space on the chart.
Phew. I've had enough. I'll see you – and those retail numbers – in the morning.
It always seems like during the rare instances that a major white collar criminal is arrested and convicted, they conveniently die shortly thereafter. The example of Kenneth Lay springs to mind. The latest is Danny Pang, the Bernie Madoff of the West Coast. He died at 42 of mysterious causes. How about that.
I tilted at this windmill a few times this summer without success. In spite of that, I put in my largest position on Friday on RTH based on this retracement. My stop is at $90. I am short 2,900 shares.