Technical investors and traders make their decisions to buy, sell or sell short based on price analysis. There are many technical analysis tools available on all charting platforms, each platform marketing that they have more analysis tools than the others. Do you need them?

Let’s review the chart of Five Below (FIVE) using simple technical analysis techniques. 

 

At Master Trader, we teach that less is more when it comes to your charting. We know that it’s tough for you starting out to accept that when you’re being told you that you need a variety of indicators by those using them or selling their own. Selling indicators is a business in of itself.

Chart of FIVE BELOW (FIVE)

Technical Analysis of FIVE

After FIVE gapped above price resistance and its moving averages on heavy volume (professional gap) it started a move higher. After a 35% advance, FIVE began to move sideways in a whippy consolidation, which could have resulted in a move higher.

However, after a retest of the prior Topping Tail (TT) another one formed and sellers took decisive control. Prices then dropped sharply forming a Bearish Wide Range Bar (-WRB).

Master Trader Tip: An individual candlestick is one piece of information. Alone it may mean little, but when combined with multiple candlesticks signals their messages become powerful. Your technical analysis should combine multiple concepts to form a strategy.

Once prices broke below the consolidation, the message was that prices are going lower. But where to get in (sell short) if you did not on the break? Ideally, it is on a retracement back to what was support and is now resistance – the area of the red box.

Currently, we see a bearish reversal below that area, which is not the ideal place to enter since it’s not at price resistance. What now?

Well, you have choices.

Wait to see if prices ignore that bearish reversal and move up to the price resistance area and then form a bearish reversal. The downside of that may be that prices break lower without moving up first and you’re not in, it happens.

You could sell short below the bearish reversal with a stop-loss above the high. That stop-loss may be too tight and you’ll be stopped out only to see prices then reverse and move lower. Had that happen before?

Continuation Patterns

This current setup is a continuation pattern and it could work since the move has just started – the breakdown.

Master Trader Tip: Continuation patterns have the best odds of working at the start of a move. Afterwards, the odds of a whipsaw increase dramatically.

Another option is to sell below the reversal, but with a half-size position, rather than an all-in one with a larger stop-loss above the resistance area.

This allows you to enter with the option to add – if possible – and you don’t miss the move lower should it happen without a move up to resistance. And if it does drop right away, odds are that there will be a secondary setup to add to the position and reduce the stop-loss to that new second level.

There are options strategies we could use as well, but we’ll leave that for another lesson.

Master Traders are not one-dimensional in their analysis or trading plan. If you are just starting out in the markets you have a lot to learn, the same as in any other profession.

If you would like to learn how the markets developed, how they work and gain a foundation to technical analysis. Sign up for our Free Course Introduction to Market Investing and Trading.

Happy trading!  If you have any questions or comments, please e-mail Greg Capra at Greg@mastertrader.com or Dan Gibby at Dan@mastertrader.com

All the best,

Greg Capra
Managing Director and Pristine Founder

Dan Gibby
Chief Options Strategist

Follow Greg on Twitter, YouTube, and StockTwits to get real-time updates and education:

Twitter: @GregCapra
Stocktwits: Greg_Capra

youtube.com/c/mastertrader (please subscribe to receive all the timely stock market updates)