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First up is life insurance provider Aviva (NYSE:AV). Since October 2011 the stock has been ranging between approximately $7.75 and $12.60. A bullish engulfing pattern on April 2 signals a potential short-term shift, from selling to buying. The pattern occurs after testing the $9 mark, not an important level itself, but if the stock does rise from here, it will have created a higher low. Couple this with the higher high it saw in early January 2013 and it is a strong indication that the overall trend is shifting to the upside. The overall range is still a dominant factor, though. I'd keep the stop fairly tight, near $8.50, as it is still uncertain if the bullish engulfing pattern will see any buying follow-through.
SEE: Technical Analysis: Support And Resistance
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EchoStar (Nasdaq:SATS), a communications equipment developer and distributor has performed well from mid-2012 through to January 2013, moving from a low of $25.30 to a high of 39.99. Since mid-January the stock has settled, trading below the high but having risen off the $37.20 March low. The bullish engulfing pattern on April 2 must therefore be taken in this context. While it was a strong upside move, large moves aren't foreign to this stock, as it can be quite volatile. Also, a move above $40, regardless of what form it takes, is more bullish than any pattern that takes place below it. Therefore, look for a pop above $40 to indicate the next wave of uptrend is underway. On the flip-side, a drop below $37 is a danger signal for a further decline.
SEE: Interpreting Support And Resistance Zones
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Retail Properties of America (NYSE: RPAI)
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Retail Properties of America (NYSE:RPAI) has a very similar set-up to EchoStar. Overall the REIT is in a strong uptrend, but has taken a breather since early-march, pulling back from the $15.26 high. The bullish engulfing pattern on April 2 signals the pullback may be over, but I'm not convinced just yet, as it is still in correction mode. If it moves above $15, though, it looks more bullish and if it can push through $15.26 it looks like reaching $16 shouldn't be too much of a stretch. Basically, I want to see some buying follow-through on this pattern; no follow-through, no trade. If it does move above $15, I'd place my stop near $14.25 (or just below whatever the recent low is at the time).
SEE: Support & Resistance Basics
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Shanda Games (Nasdaq: GAME)
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From trading above $7.50 in April 2011, to less than $3 today, Shanda Games (Nasdaq:GAME) is in a down trend on all timeframes. The online gaming company has been range bound most of this year, trading between extremes of $3.32 and $2.88. Other bullish engulfing patterns have developed during this period, which have amounted to little in the way of shifting the overall direction. Therefore, the engulfing pattern does show there are some traders looking to buy shares but, overall, the stock gets more bullish if it can get above $3.35. In the mean time, if it drops below $2.88 again it is likely headed for a test of the December low at $2.71 and potentially lower.
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The Bottom Line |
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Bullish engulfing patterns are quite common, and usually the context of the move is more important than the actual pattern. While the signal is tradable on its own, often seeing if there is any follow-through buying is the preferred method, especially when the stock is in an overall downtrend. If you trade based on the price pattern, control your risk with price as well; set a stop below a recent low. If the stop is triggered it means the pattern was false anyway, and there will likely be a better time to pick up the stock again in the future.
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article. |
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