Last week, Research Analyst Xin Yang shared about a trade he made on the NYSE on a stock named Wageworks Inc. The reasons he believed this stock was going to rise was due to a couple of reasons as mentioned below:

  1. A hammer candlestick pattern with extreme long low shadows which signifies strong buying pressure
  2. Confirmation of previous support levels
  3. High volume, signifying high liquidity

I recently made a trade based on very similar principles, which I will illustrate now through a chart. This company, named Chemtura Corp, is also trading on the NYSE. Of course, with technical analysis, it is not very important to know the industry the company is operating in or what it’s business structure is since the emphasis is on using price movements to determine the short term sentiment towards the stock. But just for additional information, Chemtura is a diversified global developer, manufacturer and marketer of performance-driven engineered specialty chemicals. The Company’s products are sold to industrial manufacturing customers for use as additives, ingredients or intermediates.

With that, I shall jump back into the technical analysis.

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As you can see, looking at the chart above, we have a repeat occurrence of Point 1 and 3, i.e. a hammer candlestick pattern in addition to high trading volume. On the immediate subsequent two trading days after the candlestick pattern, we can see prices already moving upwards. Of course, we do not know whether these prices can be sustained; after all, trading always involves risk-taking. However, we can reduce the risk element by making calculated and analytical guesstimates of what the recent price movements are telling us.

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In the past 1 year, there weren’t many clear cut support lines (point 2) at the price level which the hammer candlestick pattern bottomed off at, with the exception of the most recent one (right-most). So I decided to look at the 2-year historical chart to determine whether there was any significance of this price level. It turns out that there were numerous instances where this price level acted as either support or resistance, as shown in the blue circles in the chart above. It is important to note that theory states that a support can turn into a resistance upon the breaking of support and vice versa.

 Of course, all these seems to fit in nicely with the principles, hence making it seem as if I am all set to make a tidy profit from this trade. However there are definitely some factors to consider in this particular trade:

  • Does the recent bouncing off of price against the support line have significant relevance?
  • Is the company going to release news (earnings, new products, M&A etc) that might have a drastic short-term impact on prices?
  • What is the level I should take profit at?

With that, I leave you to analyze my latest trade (please do leave comments if you wish haha) and myself to continue to track the development of this stock. Peace out.