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Hey, this is Sasha Evdakov.
Today we're going to take a look at technical analysis case study as far as Tesla goes. And we'll do a little bit of practice.
This is great if you're getting started with technical analysis or you want to learn a little more about technical analysis. You want to break apart a chart in great detail.
That's what we're going to do is we're going to take a look at this chart. And we're going to break it apart in detail.
If you're reading this, I highly recommend you take a look at the video. I will give you some critical insights on what to watch for as well even if you're reading this.
Before we go in detail onto this keep in mind that none of the stocks here are recommendations to buy or sell. Consult with your financial advisor before taking on any trade.
Illustration of the Example - Tesla
Let's take a look at the chart. I'm going to use a drawing program here to illustrate this example. I believe you want to understand investing and looking at charts.
It's essential that when you're studying and evaluating charts the point behind it is to predict future price movements.
But to predict future price movements, you need to:
- understand how a stock moves
- understand how a stock behaves
- understand how it acts
- know what it's done in the past
- see what you're expecting to do in the future
For example, you might be looking at Michael Jordan when he was very popular. He was able to score a certain amount of points every single game.
Then more than likely the next game or the next game after that you would expect a specific type of result. Time and time again because that's what that type of player or person did.
With stocks is the same story. Tesla has a specific type of group of traders. Not only because it trades at a particular price range, but because of the people that are attracted to trading this type of stock.
There are some day traders, swing traders, longer-term investors, but in general. It attracts a specific type of person. If you're looking for like a Microsoft or a Bank of America, those attract a different kind of person.
Sometimes those things overlap, but in general, you have a type of person that gets attracted to these types of stocks. In either case, when we start evaluating these charts, you're looking at human behavior.
The price tells you:
- about human behavior,
- what people want
- what people don't want
- how things are acting
- when things are running out of fuel
Take a look at this upward trend right here. As you look at Tesla here and you're looking for this uptrend that we've had eventually these things run out of gas. The steeper these things move eventually they run out of gas.
You can't keep pushing a rocket ship to the moon without giving something back. Eventually, it runs out of gas. At least in our current environment and state that we live in.
In this case, the same concept as you continue to move higher eventually this is why you need pullbacks. When you see things continuing to move higher, that's why finally you get these pullbacks. These pullbacks allow that stock to continue to move higher, digest or consolidate.
Stocks don't go straight up. I think if you've been trading for a little bit of time you know and understand that. In either case, one of the things that I look at when I first look at charts is I tell myself a story.
Especially when I didn't understand how stocks moved and behaved. I used to tell myself a little story, and when it comes to that, it's an exciting concept. When you tell yourself a story, it makes things easier. Humans think in terms of stories.
When it comes to Tesla and we start looking at this you can see this stock was moving sideways. It was under the $50 range. The story here is this stock was the first company. It was getting started and building energy and momentum.
It's getting its exposure, the marketing - that was happening. And people started to build into buying this stock. As they continue to develop into this eventually right around early 2013, you had some catalyst. You had a news catalyst, some awareness that started to happen. More people got excited about what this company was doing.
There was a lot more to the forefront of this company. And when this happened, this stock started to explode. You can see that by this big candle bar that happened. When this happened, more buyers continued to step in. There's more excitement, and we continue to move higher to the upside.
You could discuss every bar and every tick here but in our sake for our examples of evaluating a stock chart we're looking at the bigger picture.
The stock had a great movement to the upside up until about the end of 2013. In 2013 it made its presence known. Once its existence was known so many people got into the stock and then it needed a pullback. It was too far extended, and it was starting to run on fumes. The evaluation for how far it went in a short amount of time was far stretched.
If you look at the moving average here that we have and compare it to at the highs the distance, there is much greater than if we look at somewhere in June. The distance is a lot smaller. In either case, you can see it's quite stretched.
- What are the stocks do when they get overextended?
Well, they pull back, and that's what happened.
This stock needed a calming down period to acquire new investments to get more value. Also, people who got into the stock at these earlier points started taking some profits.
We loaded the gun back up and then we got more gas. After we got more gas, we continued higher. And a stock continued to power to the upside once more.
Over time things get a little extended. We're coming towards the end of our tank, and we need a little bit of the breather.
- What does the stock do?
Towards mid-2014 we have a slight pullback. This is what you do if you're telling yourself a story. Now the stock continued to move in this wave-like pattern for over the next year or two. But we slowly start running into roadblocks at higher prices. This is where the problem begins to lie with this stock.
We're starting to move, but we're not moving as fast. The stock now becomes a lot more known. It becomes more available to the public as far as news goes and as far as awareness goes. The price that it's priced in. It needs to start hitting things in perfection for it to continue to grow. And that becomes a lot more difficult because they are innovating.
Over the next 2015 and 2016, we've been moving in a sideways pattern between the 175 and 270 level. And in there we've had some ups and downs. But on a bigger picture scope, we've had some sideways action.
If you break this apart once more, you can see that at the beginning we had an accumulation stage. Then in the next part, we had that growth stage. The stage where we had that upward movement. The initial investor started to come in. And then from then on, we've been in a distribution or consolidation stage. Or we are moving sideways.
You can see that this is how you're looking at a stock when you're starting to break it down.
ABCD Patterns - What to pay attention to?
When we start looking at some more technical patterns and technical evaluations you can start looking at things like ABCD patterns.
As you start getting more specific, you can look at ABCD patterns on the weekly. Or you can look at it on the daily, and you can look at it on the monthly. I'm doing it right now on the weekly because it's easier to see, especially as a teaching example.
- Where are ABCD patterns?
- How are they formed?
They're usually based on swing points - where the stock changes directions. That's what a swing point is.
Look at where a stock changes directions. You get an idea of the swing points. When we start looking at ABCD patterns what's interesting about them is they talk about human behavior.
They're telling you about the cyclical moves in stock and rhythm in a pattern. Like you have a sleep pattern. Typically most humans go to bed at 10 p.m. and wake up by 7 or 8 a.m.
You have that sleep pattern that you continue to go through day in and day out. You have that pattern, and ABCD patterns are very similar. If I plop A where the stock changed movement, then we go to the B at the next point where we had a change.
That would go to B to C. We have that little pullback and the C to D. You can see how that works out in terms of the patterns. If you start drawing things together and connecting these you can see that pattern standing out - ABCD patterns.
I'll draw a couple more patterns so that you're aware that ABCD patterns don't have to happen to the upside.
Also, you have them to the downside. Sometimes they're not as clean, but I will still share with you how those look. That way you get an idea, so we had a downward ABCD pattern and 2015 to about 2016 - Tesla. You can see there are another nice and clean ABCD patterns. Yes, there are other ABCD patterns in between that, but right now I'm showing you the clean patterns.
That way you learn what you're looking for. And once you discover what you're looking for you can search for subtle little ABCD patterns. It's better to focus on cleaner patterns. That way you understand what's going on. Once you know what's going on with ABCD patterns, then you can modify these. You can manipulate these and use them on your terms and your chart.
Now here's the other exciting fact behind ABCD patterns. When you're looking at ABCD patterns, you're looking for the volume to confirm this pattern.
From the A to B pattern you have massive volume coming in or good volume. When you have the volume, you have gas in the gas tank. In this case, you can see that we have volume coming in. And we have the full price spread that follows through.
That's why you continue to get the follow through on that movement. When you start getting a pullback on the B to C leg, this is typically lower volume.
As you get into the next stage, it might even appear that it's higher volume. The thing is if you compare it to the previous volume it should be lighter volume. Then finally the next leg (C to D) you want to see the more substantial volume to the upside from the C to D leg.
It's more massive than the B to C leg. This is not always the case I found over the years. You may see some lighter volume, but the expansion can still be pretty good. Or you still want an increase in volume.
If you notice here in Tesla in 2014 even though we don't have heavier volume than the retracement B to C, we still have an incline in volume. Or the volume starts to grow. As you can see it's not always the case, but that's what you want to see.
What's Happening to The Downside?
This is the same thing when it happens to the downside. If we take the 2015 movement to the downside, the A to B you can see that it's the slightly red volume is picking up.
The bearish volume or the big sticks on the red bars are picking up. As we get this retracement which is the B to C you can see the volume is very light. The B to C moves to the upside because this is a bearish pattern.
It's contracting, and when we're talking about the bullish volume, you can see it's a lot lighter. Then as we get our next break lower again which is the C to D, you can see that volume picking up again on the bearish end.
That's what you like to see on these charts. And that's what makes a significant price movement. That's healthy. If you see a stock moving in a direction with lighter volume that means there's less gas. That means that there's less conviction. It's less likely to stand the test of time. It's less likely to continue moving in that direction.
It doesn't mean it can't. It means it's less likely to continue. That's why we always look at volume as a clear sign or indicator for future price movements and actions and behaviors.
When we start evaluating at this chart, you're combining multiple things.
- ABCD pattern
- the price action
- the volume
When we're talking about price action, it's essential how the price is moving, which means these wide bars from the open to the close.
You're putting those together to create and evaluating that chart. At least that's the simple and basic form.
Pro tip: You could use other indicators to help with this, but I find that the more complicated you make things, the more cluttered your mind becomes. Keep things simple.
As we look at the chart as a whole one of the things that I always like to stress is you start comparing these charts. You start comparing them to the previous volumes.
The other thing is when you look at retracements and pullbacks a typical retracement is 50%. That means nothing is wrong with the stock. You can get other retracements which are 61.8 or 38.2, but it's based on the Fibonacci sequence.
The simple thing behind the Bonacci sequence is it's a way to gauge retracement. Fibonacci numbers are mathematical numbers. When you add the first two, you get the next one. Then you add the following two you reach the next number and so forth.
They continue moving along those lines. But as you put them in charts, it allows us to predict human behavior better. These are not magic numbers or formulas that are going to give you perfect answers whenever a pullback is going to stop. But it'll give you a guideline of what's a healthy pullback and retracement.
If we take this initial movement and we look at this stock, overall you can see our pullbacks here are 50%, 38.2%, 23.6%, and 61.8%.
I focus on 50%, 61.8%, and 38.2% - those are the main ones that you want to focus on. Something like 23.6% doesn't hit as often. But if you look at this and we drew the line from the lows or the swing point to the highs you can see what these lines tell you.
Our pullback comes right at 50%. You can see if I draw that line all the way across you can see we're hitting right at 50%.
The other important thing you can remember is the projected move. How far you expect the next step to go from the C point or after you get the retracement?
Well, if you measure A to B, you will get the distance from C to D.
In this case, if we take our numbers (call it $40), you get about 155 points on the left.
If you draw the same thing from the lows of point C and you go all the way to D, you get about 148 points. About five points off which is not a big deal when it comes to stocks.
You can see it's close when it comes to the projected move. It's interesting how this works out.
Next example - ABCD pattern:
If you look at the next leg or the next stage, we have our ABCD pattern. We look at this measure move right there. You can see from here to here we have 147 and then from here to here we also have 114. It's a little bit less, but the move is still in that range. It's not going to be perfect in the market.
Take a Look at Retracement
From the retracement of 2014 on that movement the pullback we went from about $130 to about $264.
And we pulled back to about 180-190. You can see that it pulls back right into that 61.8% level. It's fascinating how things work out in those ways.
Take a look at the bearish example that we had in 2016. Here's our projected ABCD pattern. It's a little bit different looking it's not as clean. But it gives you the same concept.
You could even say that you had a smaller ABCD pattern right here. That's another one as well to look at. You can see we're coming in on this retracement right there to the 50%. Notice that we have 50%, and there are our resistance and retracement.
Our pullback is into 50%. The measured move from A to B - we call it 78 points. And from highs to the end is about 92 points. It's about 20 off, but it's very similar. It's not going to be perfect, but it's very similar.
If we look at the volume of these movements, you can see the volume is building right here on the downward leg. Then if you look at retracement and you go straight down and look at the volume our volume is drawing up. And then all of a sudden on the break the volume picks up.
That's what we're watching on these moves and these measured price moves. And that's what you get. You get a subtle clean movement in the stock when you're watching these things.
When you're looking at ABCD patterns, swing points, and measured moves, this is your money leg. The C to D is your money leg. Once you find the A to B and B to C pattern, the C to D is that money leg.
Whether that's to the upside or whether that's to the downside - that's your money leg.
You can play things in ranges. We have sideways patterns right here in the stock. You can play things in ranges, but these ranges are not as big in terms of price movement as a C to D or an ABCD pattern.
I often find beginners struggle finding ABCD patterns. This is partly due to the stocks that they're looking at, but also their understanding of ABCD patterns. If you struggle to find ABCD patterns, it's crucial that you move on to another stock. That is because you're either looking for something that's not there. Or you're forcing the trade.
If you can't find an ABCD pattern, move on to another stock. Let me show you some examples of some famous companies. The reason why they're popular is that they move in the appropriate behavior.
They have enough volume. If you're trading stocks with low volume (penny stocks), sometimes it's challenging to find ABCD pattern. But in general, with most stocks, you can discover ABCD patterns.
Let's take a look at a few quick companies, and you'll get an idea. I'll backtrack this to Apple. Precisely the same thing what we discussed. If you take a look here is our A to B and then B to C and C to D pattern.
If we take the measured move from A to B, it should be equal similar to C to D. This pullback from B to C should be about 50% give or take.
Let's take the measured move:
- A to B (about 90 points)
- C to D (about 80 points)
It's very close and similar. If we calculate this pullback, there is a 50% pullback. It hits that line entirely and then takes off to the upside.
Now we're looking at this next price movement that we have.
- Can this be forming another ABCD pattern?
Let's take a look from A to B. We have right there it's coming in it's hitting right around 50%. It's similar on the pullback. There's our line of support. It's also hitting the line of resistance right here of the previous one. It was coming back to retest it. And if you do the measured move, you can see that we get about 80 points.
We're looking for potentially a target of 172 for this stock. That's how you get a necessary target for the upside.
Focus on this: pay close attention to the volume. I usually want to see a larger volume to the upside here. Now with this stock, unfortunately, we got a little bit lighter volume than here on some of the pullbacks.
This is not one thing I like to see. It can happen, but it's not something I like. The main reason is that I always want to see the volume going with it.
If I go into the weekly chart, you want to see more volume coming in as we're moving higher. On these pullbacks, you want to see the lighter volume. This is not the case when it comes to Apple. And you can see the volume is also dying down as we continue moving higher.
That's not usually a good case. But it doesn't mean the stock can't go higher. It means I'm more cautious about these stocks as they continue to move higher especially if they have less volume.
You have smaller ABCD patterns within this. Because even to the downside if you're doing calculations so you could trade those but usually keeping a bear market. The downside movements are generally smaller in terms of time frame.
Amazon - ABCD patterns
Let's take a look at Amazon. Amazon also had quite a handful of good ABCD patterns. Here we are on a weekly chart. There's an ABCD pattern from 2016 to 2017. It's a great stock.
Measured move calculation:
At the start, we got 390 points. I would expect from the pullback we also would get about 390 points. And you can see we got about 365.
When we take a look at the pullback at how the pullback came in - what was it?
Well, you can see we came right into about 50% into that pullback and bounced at the 50%. Almost directly at the $500 price level.
You got volume coming in on the break. Notice these high peaks at the highs we have the excellent volume on the bullish side. You did have this drawing up in volume slowly after the little pullback.
Then finally you got more massive buyers coming in the right after that. This stock looks like a classic ABCD pattern. Just like we've shown with Tesla and Apple. If you look at the monthly, you can see it from 2015.
GoPro Technical Analysis - ABCD Pattern
You could take about any stock, and we can do the same thing even with GoPro. As you start evaluating items take a look at a 2 or 3 day in this stock.
That way it's going to be a little bit easier to evaluate it and see the chart. We look at GoPro, and we look at it to the upside. We could say this started very similar to Tesla. There's consolidation pattern for a few months - July and August we moved sideways.
Then we had to come in volume. Exceptional bullish volume is coming into the stock. People got excited about it and then finally we had a slight little pullback.
We needed to take a gas break, and you can see the volume drawing up right there. Right under the stock, they're drying up. And then finally we have more volume coming in and further extension of prices.
We had a slight distribution at the top and then the stock continued to head lower. In this chart, you have the accumulation and the upward move.
We have an upward move of about 33 points. Then let's look at how far the pullback was. The pullback came into (the lighter pullback) 23.6% and then the stock bounce. We went into a 23.6% Fibonacci sequence and then the stock bounce.
Overall the movement was right around 30 to 33 points. If we take the lows of that B point and we go to the highs, you can see we hit it nearly perfectly 33 points. Look at that, and there is your classic ABCD pattern. If you don't know much about technical analysis and you want to keep it simple, you could do what I've shown you here.
This is what you need to do:
- look for the A to B classic pattern
- look for that volume to come in
- wait for the drawing up of volume
- get in on the C to D leg
- take most of your profits as you approach closer to the D leg
This works the same way in reverse. And this is why GoPro is an excellent example. You can see it to the upside which you could also see it to the downside.
Let's go into the moment when we're getting into the stock, and it starts to sell off. And then the counter-trend bounce.
- Can you calculate what's going to happen?
Well, here as we have the stock moving lower you can see we moved down about 58 points from the highs. We also had this retracement right here to the upside.
We had 58 points; then we got a retracement of about 26 points. If you do this Fibonacci calculation, you can see we don't hit this perfect at the 50% or 38.2%.
If you do it more around the distribution area rather than the wicks, you'll get it a little closer. That's because sometimes here was euphoric buying. It depends on the stock movement. But here when we do this calculation for 2015, you can see we're hitting it right at 50%.
We have some resistance right there, drying up, trying to break higher. It couldn't do it, so stocks continue to roll over.
- What do I estimate?
As you go down, you'll see what happens to the stock. We go 53, 54, 55 and we've got a price of $8. That is where we hit.
- What's going to happen to the stock?
We're back into this accumulation stage, and often I find that they're tough to break out of these ranges.
Sometimes it takes multiple years - 3, 5, 10 years. It's difficult, but you can see the patterns here in this stock. We're very classic when it comes to the ABCD to the upside and the ABCD to the downside.
I hope this was helpful for you in understanding these price movements. Keep in mind you're looking for the ABCD pattern first. You're looking for the swing points and volume.
As the volume starts picking up here was the selling pressure that picked up. Then we had a retracement with lighter volume. And then more selling volume picked up.
The selling pressure stayed there until we hit this low point in early 2016 with GoPro. Now we're distributing sideways and continuing to sell these stocks short.
Looking at these evaluations, stocks, prices and ABCD patterns, you can see you don't need a lot of fancy indicators to be able to evaluate a stock on a simple level.
However, there are other things that you'll go in detail as you continue to get better. But if you're getting started this is an excellent starting point for you to begin evaluating charts.
What If You Can't Find ABCD Pattern?
If you go to a specific stock (PepsiCo) and you can't find an ABCD pattern then move on to another stock.
I'll show you this right here. Sometimes C and D leg is a little more extended.
If you go to Goldman Sachs, you'll notice the same thing. If you can't find ABCD patterns move on to another stock. Especially in the more recent time frame because that's where you're trading with.
Maybe you're trading in the more recent time frame, and you can't find those ABCD patterns move on to another stock. That's the case with Bank of America as well.
Important note: ABCD patterns are there, but they're not there shining red lights at you. They're not so obvious. You have to be the one that looks for them.
You have to be the one that shows up and listen to the stock. If you have this massive volume, that's a vital sign. When you have a lot of volume coming in that usually helps find ABCD pattern.
What's interesting is that the B to C might be sideways. Keep in mind that B to C doesn't have to go down. It can also be sideways. You're looking for an expansion move on these stocks. The targets don't always get hit. It's giving you some ideas and examples but look for those patterns. It doesn't matter what company you're looking for.
I hope that I've helped you when it comes to technical analysis case studies and ABCD patterns. Use everything you've seen here and keep practicing technical analysis.
Throughout this post, you've seen what the right way of understanding price movements, swing points, and volume is. Also, you've seen how to break apart a chart in details. That is crucial when it comes to technical analysis.