“End trades when it is clear that the trend you are profiting from is over.” Jesse Livermore
Anyone can ride an uptrend. Knowing when to get out is an art.
One of the best tells in the market is relative strength.
Relative strength begets relative strength just as momentum begets momentum.
There are three kinds of relative strength I look at:
Big picture relative strength over the current quarter and over a 52 week period.
Day over day relative strength—the behavior of a name against the overall market and its peers in the group from one day to another INTRADAY relative strength—in other words how a stock is performing during the day against the market itself.
In other words, a stock that is strong on a red tape is a blaring sign of accumulation while a stock that is weak in a green tape is a sign of distribution—green beans in a sea of red versus red beans in a sea of green.
ROKU was a conspicuous red bean in a sea of green on Tuesday.
Let’s take a look at a 10 min ROKU for 5 days to see what I mean.
On the heels of Monday’s spike in ROKU to challenge its all-time closing high from Oct 1st at 76.48 and a rally day in the markets on Tuesday, ROKU gapped down.
Following a snapback into Tuesday’s open gap, ROKU rolled over.
ROKU was a red bean in a sea of green all day.
It was heavy.
It became heavier accelerating lower in the last hour.
There are a several important tape reading techniques that combined to reflect distribution in ROKU on Tuesday:
1) ROKU traced out a Trend Day on Monday following a little (10 min chart) Rule of 4 Breakout (a breakout above as 3 point trendline).
2) Tuesday’s Breakaway Gap found an opening low on a backtest of Monday’s short term breakout.
3) The snapback from the opening low actually triggered an Opening Range Breakout (ORB) a breakout above the 1st 30 minutes range. However, not all ORB’s are created equal. Remember the ORB occurred into gap window and there was no upside follow through leaving ROKU suspect….and shortable and we flagged this on our Hit & Run private twitter feed for members. Then on the runoff, ROKU triggered a Reverse ORB by taking out the morning low . It was a Reverse ORB because it triggered an up ORB in the morning; so the afternoon decline below the 1st half hours range was a reversal or a Reverse ORB.
Tuesday’s late day Reverse ORB telegraphed distribution/profit taking and as I write this pre-market on Wednesday, ROKU is down 3 points.
Whether there is news and someone knows something or the reaction is natural profit taking as ROKU flirted with all-time highs remains to be seen.
I follow signs of accumulation and distribution. I’m a tape reader.
Whether we like it or not, as traders, we’re all in the pattern recognition business.
The pattern in ROKU was heavy. The selling came from a logical region following a blistering run-up from 26 to 74 in just 10 weeks that challenged all time highs.
Let’s pull back the lens and look at ROKU’s round trip on the dailies below.
First and foremost, ROKU is a great example of how to determine what legendary trader Jesse Livermore called the Line of Least Resistance using my 3 Day Chart Method.
ROKU bottomed at 26 in late December. It turned its 3 Day Chart up on January 8th by tracing out 3 consecutive higher daily highs. This occurred as ROKU retook its 20 day moving average.
Remarkably, the 3 Day Chart has remained pointing up the entire rally.
To say the 3 Day Chart was stretched is an understatement on this rip from 26 to 74.
So the 3 Day Chart did a good job of mechanically defining the Line of Least Resistance to the topside.
ROKU’s refusal to ‘inhale’ with a pullback that turned its 3 Day Chart down combined with a trajectory that never kissed its rising 20 day moving average underpinned/defined ROKU’s runaway move.
So, two things— Tuesday’s distribution day after testing the low of the high bar day suggests that ROKU should turn its 3 Day Chart down and should test its 20 day moving average.
This morning ROKU is set to open well below Tuesday’s low. In so doing it will satisfy two consecutive lower daily lows.
It needs a 3rd consecutive lower daily low to turn its 3 Day Chart down.
This could be accomplished on Thursday.
The 3 Day Chart is likely to turn down prior to ROKU testing its rising 20 day moving average because ROKU is quite stretched above its 20 day line.
However, you never know—there could be a downgrade on the table.
A turndown in the 3 Day Chart in tandem with a test of the 20 day m.a. (a Holy Grail buy signal) is one of my most powerful patterns.
For example, this was the pattern W had just prior to rocketing after earnings.
I can’t help but wonder if a pullback in ROKU here will install the Handle of what I call a Stein & Handle pattern.
This is similar to a Cup & Handle but instead of a rounding bottom you have more of a V –shaped bottom.
In early February with ROKU trading in the low 40’s we did a video which projected that ROKU would push to 52 and that the subsequent behavior would be a tell.
Notice the large explosive bar on February 22nd. This was an Expansion Breakout buy signal as it was the largest range in 10 days to a new 60 day high.
We know that range precedes price and ROKU grinded higher for the next three weeks being magnetized toward all-time highs.
Importantly, the Feb 22 Expansion Range buy signal occurred on a knife through the important 52 reference point.
52 was the Breakaway Gap in August that perpetuated a run to the October all-time high.
The Breakaway Gap to the downside in early November occurred at 52.
The market has a memory. ROKU knew this 52 level. The stock proved it knew this level in the past and clearing 52 with authority in February implied a test of all time highs.
Finally, on Tuesday ROKU left what I call a Fantasy Island sell. This is not a picture perfect Island as the gap down is within the body of the prior bar versus a gap below the prior day’s low.
When a stock gaps down from a new 60 day high region closing below the prior days low it leaves a Fantasy Island sell signal. I created this strategy to define turning points after runaway moves.
This morning’s pressure in ROKU speaks to the signal.
You don’t need much of a bend in the trend as a runaway train is speeding down the tracks for a derailment.
A Fantasy Island is often a stealth warning that the train rounding the bend too fast.
Interestingly, notice that a Fantasy Island sell signal occurred directly off the all time early October high as well.
Conclusion: Speculation is observation, pure and experiential. Thinking isn’t necessary and often just gets us into trouble. Markets turn on a dime, most traders cannot. Our Hit & Run signals combined with observing relative strength tells the tale of the tape revealing Jesse Livermore’s Line of Least Resistance.