The depth of the head and shoulder pattern is measured and the value projected upwards. This gives an upside target near 96. Sound familiar?
This is also the support midlevel indicated by the pile driver low. The activity between 96 and the next support level at 112 includes a high level of volatility. This suggests traders could see a high level of volatility again as the market ranges in this consolidation area.
A break above 112 soon runs into long-term historical resistance near 124. The important message is that the fast run and the early easy capital gains have now slowed. The up trend will continue, but it faces more resistance barriers to the rate of capital appreciation will be slower. A move from 85 to 125 offers a 47% return but the price may take many months to achieve this target.
Traders who entered in the 40 to 60 area may consider applying zero cost averaging strategies to lock in capital gains and reduce the time risk involved with a sideways consolidation movement in price.
This is a money management strategy more effective than the “sell half” response to a rising trend. The strategy works in a rising market. Traders sell a number of shares from their position sufficient to recover the original capital outlay for the position.
If the position cost $10,000 to establish, the trader sells $10,000 worth of shares when the price increases by 100% or more. This strategy is most successful when the number of shares sold to recover capital is less than half the original position.
From a practical point of view, the trader has his original capital back. The remaining shares in the position cannot revert to a zero-dollar value unless the stock is suspended or delisted. This position will always show some profit, even if the stock price falls.
Zero cost averaging is an effective way to make capital work with low risk. This strategy is discussed in full in The 36 Strategies of the Chinese for Financial Traders.
It goes to show that with a proper chart analysis, you will be always be able to sift through and identify banks that have a solid footing from those which look set to follow Lehman's fate.
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