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Alias Born 02/07/2004

Sunday, December 12, 2004 2:43:29 PM

Re: None

Post# of 18564
The "Whoops" Theory - by a kid with crayons:)

I shared in a PM with a friend - my collective thoughts on this "Candle outside the Lower BB bounce theory" that I have gotten all worked up about:) Of course, I have not discovered anything new by any stretch, but with my new found belief that a "single print divergence" is indeed a powerful pre-warning to a directional trend change, along with my new interest in candlesticks - I have decided to "tinker" around in this area a bit and seed where it leads.

Doing back-testing on this theory - I can find very nice moves in the middle of the chart on many, many examples of this set-up. However, the reality is - we trade the right side of the chart - so I decide to try and explain the concept to myself in the simplest way I could come up with. Out came my crayons and here's what I came up with.

I see this as a "WHOOPS" type of move - (silly - but here's the analogy)

My thoughts are that the price needs to close outside the lower BB to be meaningful. I could be wrong - but I'm not sure just a piercing is enough for the bounce.

1). The stock gets a bit exhausted for whatever reason.
2). It gets beaten down on a panic sell-off and closes outside the lower BB.
3). The market says - whoops - shouldn't have closed outside of the rubber band - need to fix that.
4). Some bottom buying comes in to correct the whoops and the stock makes some gains in order to correct the whoops within a few days.
5). Now that the whoops has been corrected over a day or two - the chart and indicators are starting to look pretty good.
6). Buyers see the stock made some gains for a days or two - which causes some momentum that would not have been there without the whoops.

Here's a few things that I feel will disqualify a Whoops Candidate:

1). Volume - There needs to be some volume (duh) to make the move work. Without it - the stock can drift and the BB eases down to meet the price.

2). Trend - It will not work with a stock where the price has been moving down by hugging the lower BB line for any significant time. When it falls out there - I think it is somewhat meaningless.

3). It should be a real stock - I back-tested it on BB's and it seemed to work many times, but they are obviously more risky.

That's about it - nothing concrete or final - but the primitive beginnings of a potential tool to be added to the trading belt.



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