Michelle B submits:
Taz Trader discussed the diamond pattern forming in the Q’s in his second post dated February 5 and provided a nice chart of the formation in progress. Diamonds are both rare and very tricky. Quoted from How Charts Can Help You In the Stock Market by William L. Jiler (p 129):
The Diamond is most often found after a big swing in price. It is an exciting time, with the public alternately enthusiastic about the stock and worried about it. This naturally causes prices to fluctuate. If there were less excitement, prices would hold in a more or less horizontal channel, reflecting a momentary balance of supply and demand. Instead, prices seesaw with greater and greater swings, on high volume. Then the excitement begins to fade, the price swings contract and volume declines noticeably. The highs and lows of this period now form a diamond. When prices later break through its highs or lows, volume may be expected to pick up sharply.
Diamonds are trickier than the other continuation Patterns we have just discussed–in fact, some of them develop into reversal Patterns. Further, they sometimes are confused with other types of patterns. The price movement may look like a Head and Shoulders, or an Extended V. The distinguishing marks of the diamond are its upper and lower points, and its volume behavior. One pattern of development after Diamonds form is worth noting. Often, prices will break down through an apparent diamond top and later turn to rally to sharply higher ground.
Jiler wrote his classic in 1962, and despite that, or perhaps because of that, it offers the clearest and simplest explanations behind the supply and demand represented by chart patterns and charts showing those patterns that I have encountered, though most of the companies used for the charts are now defunct or absorbed into others. So keep in mind, this book was written way before the advent of bling, when reading the following quote:
Tricky or not, diamonds often are followed by exciting developments; as every woman knows, they are worth collecting.
In order for a breakout up from this pattern to be confirmed and therefore resulting in a continuation of the uptrend that started in the middle of last year, a closing price of 45.40 needs to be surpassed on significant volume, and for a breakdown from this pattern which would cause a reversal from an uptrend to a downtrend, the closing price needs to be under 42.88 on above average volume.
I am uncertain if the rules applying to triangle breakouts, that is, the breakout usually occurs when the formation is about 75% finished, and if the triangle completes its shape, than the breakout will most likely just fizzle out, are applied equally to diamond formations. This diamond pattern in the Q’s at present appears to be around 75% completed.
Michelle,
Nice to have you back. Great posting!!!
… I think you are maybe referring to this link here: http://www.swing-trade-stocks.com/200702.html#e50 …
Best Regards,
JH.
Thanks for the link correction Joao
Thanks, Joao. Mike just fixed the link.
Thanks for the mention and for the added research on the diamond pattern. It will be interesting to see which way the Q’s break!
Michelle, Mike, you’re welcome… I should be the one who thanks for the good content in your blog.
I just bought Jiler’s book, and its in way up to here in Brazil
Michelle, I got familiar with the book in your stocktickr interview. I hope its a good reading.
Joao,
Years ago, when Gary B. Smith, the Chartman, was writing his column for TheStreet.com, he recommended Jiler’s book as being an excellent and basic primer in chart patterns. I got it on that basis, and I have not been disappointed. It’s not a racy read, but then again, there are other kinds of books if you want that kind of effect!
Michelle, In fact I ordered last 15th. I use to buy 3 books at once so I can reduce my shipping cost. It will take about 1 month to put my hands on the book
I did a lot of research on beforehand and I think it will add a good value to my trading education.
The other titles are:
- Pring, Technician’s Guide to Day and Swing Trading (Recommended by Jamie).
- Wyckoff, Studies in Tape Reading.
What happened to the QQQQ’s in the last minute? The $NDX was up .67%, and unless it was a bad data point, the QQQQ’s finished -.07%. I have double checked with Yahoo & Fidelity, and they have the same closing price. That would mean the QQQQ’s are still in the same trading range since the end of November, and did not break out today towards their Jan. 16 highs.
I think it was bad data. I see some spike around 4:00 but it’s trading at 45.08 (+0.83% on the day) in the after-hours session — still below the January high though
Welcome back Michelle!
The diamond pattern has always been a difficult one for me. I will be watching the Qs closely to see which way this pattern breaks.