Bump-and-Run Bottoms (BARBs)

It would appear the long-absent buyers of the market have been heard from. The last week started as usual, but Tuesday saw a tremendous gain on unusual volume. Floor traders estimated 75% of the short sellers had covered compared to the usual 10-15% at market bottoms. As if to confirm the assessment, the next three days continued the rally on above-average volume.

The pattern potentially forming appears a bump-and-run bottom. The key word is “potentially.” A pattern is not valid until it confirms, and a bottom bump-and-run confirms when price closes above the down trendline drawn across the price peaks. However, one can anticipate that happening and prepare for the event.

One indication the trendline holds validity is that it is virtually synonymous with the 50-day moving average. In the recent past, the price has honored the moving average several times, peaking at it, and then retreating.

At the current rate of ascent, that could happen within the week. Chances are, however, it will pause at least once before that time. During the preceding downward movement price paused at approximately at the halfway point of the total move. This is known as a flag, and it often “flies at half-mast.” This also roughly coincides with a previous low at 741, which was a point of temporary support going down and formed resistance going up. That resistance limited the price ascent to only a day’s pause, attesting to the power of the upward movement.

There exist additional resistance levels at approximately 800, which will also approximate the level of the trendline and 50-day moving average as price ascends toward that level. These provide too many resistance indicators to expect the price to ignore them, but will indicate movement strength once exceeded.

Should the breakout happen, confirming the bump-and-run bottom, the price target will top at 943. This provides a nice profit but one cannot buy the S&P 500. Instead, we can purchase an Exchange Traded Fund (ETF) that represents the S&P500. One the best bets is RSU, which shows the same developing pattern as the S&P index, and has even better volume increases on the upward price movement. Assuming a breakout level of 18, the price target would be 25, giving a potential profit of almost 40%.

Bump-and-run bottoms have an average target of 38% gain with a 68% chance of reaching that target, yet only a 5% chance of not realizing breakeven. Nice odds.

Another potential trade is the Financial ETF, FAS. FAS is not a bump-and-run, but has a trendline breakout already, with the movement upwards on tremendously increased volume. If an improved outlook in Financials is generating the market movement, it is reasonable that Financials lead the market. It is indeed doing so, and it is already a trade. The price has already moved from 2.32 to 5.15, over 100% in five days.

The target price here is calculated as the distance between the dip price (2.32) and the trendline directly above that price, which I would estimate is above the current price of 5.15. This gives a target around 8, or over 50% profit. It may well run all the way to the 50-day moving average now at 10, providing a 100%. The stop-loss point should be any close under the down trendline.

These are examples of technical analysis, which provides traders a way to make an enviable living. The objective is to find stocks in patterns and positions that provide favorable odds of a favorable outcome, then taking positions in those trades. Traders use quick loss limiting exits should the position go adverse, thus limiting losses. The price targets should be at least 3 times the stop loss point, thus allowing a profit even if the trader is correct only half the time.