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Trading Opportunities

Occasionally, stock prices can exhibit combinations of technical indications that strongly predict large price movements. Such combinations rarely occur, but when they do, there are often opportunities for very profitable trades. We call this trading opportunities.
This document describes 10 types of trading opportunities. For each of these, the theory behind the opportunity is described, and how the various parameters such as recommended buying price, price target and stop loss are calculated. In the introduction the terms that are common to all trading opportunities are described.

Terms
Buying price for trading opportunities is often set lower than the current price. This does not mean that the stock is not worth buying now, but rather that it is possible to achieve even better results by waiting a little. For examply by placing a buy order with a price limit equal to the given buying price.

Target price is set to the price the stock is assumed to reach within the given time horizon. This level is often computed by using the height of the formation, the ceiling of a trend channel or a resistance level.

Stop loss is given as two prices. The first is the limit that the stop loss is set at. If the price of the stock closes the day on or below this price, it should (according to the strategy of trading opportunities) be sold. It will often be difficult to sell the stock at exactly the stop loss price, so in addition, a "stop loss estimate" is given. This is calculated as the stop loss limit minus half of the normal daily variation of the stock price. This is seen as a realistic sell price when using stop loss. For stocks with low liquidity it can be difficult to use stop loss, and if the price falls substantially below the stop loss level, it may be smarter to wait for a reaction up, than to sell at a low price.
Note that the stop loss level applies to the closing price. If the price reaches the stop loss level intraday, this should not trigger selling of the stock. If the closing price triggers the stop loss, it can often be a good idea to sell at the opening auction the following day. Alternatively, one could set a limit based on how the market develops.

Risk/reward ratio The risk/reward ratio is calculated as the upside potential vs. the downside potential, i.e. the reward of a successful investment (selling at price target) compared to the result in case of a failed investment (selling at stop loss). The downside potential is always set to 1, so the higher the upside potential, the higher the return is, taking the risk into account.
Note that the likelyhood that the target is reached, or the likelyhood that the stop loss is triggered, is not taken into account. These are factors the user should evaluate.

Time horizon gives the upper and lower limit for how much time it is estimated it will take for the price to move from the buying price to the target price.

Support- and resistance levels If support- or resistance levels exist very near to the calculated buying-, target- or stop loss prices, the prices are adjusted to these. It may for example not be smart to buy at a price of 8.90 is there is resistance at 9.00. It may also not be smart to sell at a stop loss of 6.60 if there is support at 6.50, or to have a target price of 12.70 if there is resistance at 12.50.

Score Every trading opportunity is given a score between 0 and 100. This score is shown in both the tables and on the details pages (in brackets after the title). The higher the score, the better the stock satisfies the criteria that theoretically define the trading opportunity, and the better the possibility to make a profitable trade with the stock. Note that several of the technical indicators that we measure per stock are not included in the computation of score for trading opportunities. Some of these, such as support and resistance, trend direction and volume balance, can be very important for the technical outlook of a stock. The trading opportunities with the highest scores will therefore not automatically be the best trades. We therefore recommend users to look at the whole picture, short and long term, and for example also evaluate fundamental information before trading. Please also note that risk is not included in the calculation of the score. Two stocks with the same score can have very different risks. Stocks with very low liquidity will be excluded from trading opportunities, but the liquidity requirements to be included in trading opportunities are relatively low. Only trading opportunities with a score of 70 or higher are listed, but institutional users can change this limit by going to "Profile".

Trading Opportunity

Oversold RSI and price near support


Theory: RSI stands for Relative Strength Index and is defined as 100 times the sum of the last N days rise, divided by (the sum of the last N days rise plus the sum of the last N days fall), where N is 14, 21 or 90 for the short, medium and long term chart, respectively. Oversold RSI, meaning low RSI-values, means that lately the price has fallen a lot without many reactions up inbetween. There has been too much focus on negative aspects, and the stock has been dominated by sellers. This can not last indefinitely, and the stock should see a reaction up soon.
The fact that the price is near the support, means that when the price was at this level previously, the price showed an upward reaction. Investors who did not profit from the last increase, will want to buy now, and those who did buy the last time, but sold again, will want to buy again.
When these criteria occur simultaneously, we get a strong signal that the price will rise. At the same time, we have the opportunity to invest with a low risk, by placing a stop loss just below the support.

Score: The closer the price is to the support, and the stronger the support level is, the higher the score. RSI should in addition be low and the volume balance and the relationship between volume tops and price tops should be positive. Also, it is positive if a bottom is formed in the price or RSI chart.
Details

Trading Opportunity

Positiv divergence between RSI and price, and price near support



Theory: See above for definition of RSI. RSI measures the degree to which buyers or sellers have been influencing the price lately. Low values means that sellers have been most influential, while high values means that buyers have been most influential. When the RSI-chart is increasing, this means the buying interest is increasing and that buyers, relatively seen, get more influence in determining the price. If this happens while the price is moving sideways, or downwards, this is seen as an early signal of a possible upward movement of the price.
The fact that the price is near the support, means that when the price was at this level previously, the price showed an upward reaction. Investors who did not profit from the last increase, will want to buy now, and those who did buy the last time, but sold again, will want to buy again.
When these criteria occur simultaneously, we get a strong signal that the price will rise. At the same time, we have the opportunity to invest with a low risk, by placing a stop loss just below the support.

Score: The degree of divergence between RSI and price is important for the calculation of the score. In addition, the price should be near the support and the support should be strong. Volume balance and the relationship between volume tops and price tops is also considered. Trend and price patterns also are taken into account.
Details

Trading Opportunity

Rising trend channel and price near the bottom of the channel


Theory: The value of a stock often moves in a wave-like pattern. When a company presents positive news, or the market outlook changes to a positive direction, often more of the same follows. When this happens, there also is a tendency to focus more on the positive news and less on the negative, or for the news to be interpreted more positively. A stock that is in a rising trend channel can therefore be expected to rise further within this channel. Often the stock will in the short term move up and down within the channel. The upside potential is therefore bigger when the price is at the floor of the channel, than when it is near the ceiling. When the price is near the floor of the channel, this indicates a rise for both the short and longer term. Furthermore, one has the possibility to set a tight stop loss when the price breaks down through the floor of the channel.

Score: The closer the price is to the floor of the trend channel, and the higher the quality of the trend channel, the higher the score. A recent strong price drop, such that RSI is low, also contributes to a higher score. A positive volume balance and a strong correlation between volume tops and price tops also is positive. Sell signals from formations and close to resistance levels decrease score.
Details

Trading Opportunity

Buy signal from rectangel formation in a rising trend


Theory: As described under "Rising trend and price near support", a stock within a rising trend is expected to continue rising. When a rectangle formation develops, a resistance is formed with sellers near the ceiling of the rectangle. When the price rises through the resistance this means that these sellers have been exhausted. The buying side is still the same size, but there is now a lack of sellers such that the price is driven higher. If one acts quickly and buys near the support (the old resistance) of the rectangle, one gets a good buying price and can place a tight stop loss. If the price has risen substantially after the break of the rectangle, it may be better to await a reaction back before buying.

Score: The formation's and the trend's quality, i.e. the similarity to a theoretically perfect formation and trend, are important for computing the score. The size of the formation and how long ago it was broken are also important contributors to the score. A price near the support of the formation results in a higher score than a price near the price target of the formation. If the price has reacted back below the support line after the break, this is negative. It is also negative if other formations have been formed after the break.
Details

Trading Opportunity

Rectangle formation under development in a rising trend and price near rectangle support


Theory: As described under "Rising trend and price near support", a stock in a rising trend is expected to continue rising within the trend channel. When the stock develops a rectangle formation, this is seen as a consolidation or pause before the rise continues. This is true even if the trend is broken while the rectangle formation develops, although this will increase the risk of a downward break. Often the price rises quickly once a rectangle formation is broken. Therefore, one will get a much better buying price if one buys before the break. The best buying price is at the floor of the rectangle formation. A suitable stop loss can be set right below the floor, such that the downward potential is low and the risk/reward high. Carefull investors can choose to get out of the stock at the ceiling of the rectangle formation, while those who want the highest possible return should wait till the price target is reached.

Score: The quality of the formation and the trend, meaning their similarity to a theoretically ideal formation and trend, is important for the calculation of the score. A price near the floor of the rectangle gives a higher score than a price near the ceiling. It is positive if the price is well positioned in relation to horizontal support and resistance levels, or if RSI is oversold. If the price has broken out of the rising trend channel, this is negative.
Details

Trading Opportunity

Inverse head-and-shoulder formation under development and positive volume balance


Theory: Inverse Head-and-Shoulders is a trend reversal formation and signals a reversal from a falling to a rising trend, or in other words, the start of a rising trend. The idea is that the stock has been negative for a long time and that the focus has been on negative news and weak prospects. This causes investors in the left shoulder as well as the head to press the price to bottoms lower than previous bottoms. With the rise in the head, the price reaches the level of the previous top. In a falling trend, following tops should be lower, so this is an early signal that the falling trend is ending. When we see that the price in the right shoulder forms a bottom that is higher than the bottom in the head, we have an indication that a rising trend is starting. The confirmation is when the price breaks up through the neckline. This means that the following top also will be higher than the previous top. It can often be profitable to buy while the inverse head-and-shoulder formation is under development, since the price often rises quickly once the neckline has been broken.
Positive volum balance is an isolated indication that the trend is rising, or that a falling trend is ending. Therefore the risk/reward-ratio is seen as attractive when both these circumstances occur at the same time, i.e. when we have an inverse head-and-shoulder formation under development and volume balance is positive.

Score: The quality of the formation and trend, i.e. the similarity to a theoretically perfect formation and trend, is important for the calculation of the score. A price close to the bottom in the right shoulder gives a higher score than a price near the neckline. Volume balance and correlation between price and volume development are important contributors to the total score. It is positive is the price is well positioned related to horizontal support and resistance level, but this is not weighted much. Also, a low RSI is positive. If the formation is formed near the maximum in the chart, this lowers the score, because the price can not have fallen much before the development of the formation. It is also negative is the formation is very big compared to the trend.
Details

Trading Opportunity

Reaction back to the support after buying signal from a formation


Theory: When a price formation is broken, this often means the psychology of the market actors taken as a whole is in a special mode. This can for example be that many are sorry they did not buy earlier, or that many are sorry they sold too early. In general, we can say that when a resistance level is broken, all sellers which (perhaps due to fundamental reasons) were on this level, will be gone. So, the sell-side is gone, while the buy-side is still there. When a buy signal from a formation is given, this then often causes the price to rapidly rise further. It may then be difficult to buy at a good price. Sometimes, however, there is a reaction back after a formation break. This gives buyers a new chance to get in on the stock, and this time to a good price. It is also possible to invest with a low risk if one sets stop loss just below the support from the formation.

Score: With ideal trading opportunities like this, the price has almost, but not completely, reached the price target of the formation and has then reacted back to a level relatively close to the support from the formation. A lower score is given if the price already has reached the price target before it reacts back. A high quality of the formation, meaning that the formation is very similar to a theoretically perfect formation, results in a high score. The size and age of the formation, meaning how long ago it was broken, also contribute to the score. Volume balance and correlation between volume tops and price tops is also important for calculation of the score. If the price has been below the support line after the break, this is seen as negative. It is also negative if other formations have been formed after the break.
Details

Trading Opportunity

Resistance broken and price near chart maximum


Theory: Earlier tops in the price are important for defining resistance levels. Many will think that since the price dropped at this level earlier, it might do this again. A high accumulated volume at a certain price level is also important for defining resistance. It is probable that many will want to sell again at this level again - either to repeat a good sale from earlier, or to sell without a loss. At resistance levels, there will therefor be more sellers. When the price breaks up through the resistance, this means that sellers at this level have sold their stocks. There still is buying interest, and the price rises further since there now are too few sellers. If a resistance is broken near the top in a chart, this means there is very little resistance above the current price. Maybe it also means the price has reached an all-time high, and that there is no resistance at all. The price is therefor not hindered by sellers who want to get out without a loss, and the stock can quickly rise further.

Score: The most important factor in the calculation of the score is the strength of the resistance that has been broken, the distance from the price down to this level, and the distance from the price up to the maximum price in the chart. In addition trend, possible formations and volume development are taken into account.
Details

Trading Opportunity

Buy signal after false sell signal


Theory: A sell signal from a price formation is triggered when an important support level is broken. The psychology of the market players and the company's position in its business cycle then predicts that the price will drop further. Many investors will sell. If the price does not fall down to the price target of the formation, but instead rises, this often indicates that new and positive information has become available, and that new investors are buying. The sell signal was false. There are few things that are as irritating as a stock that one just has sold, rises strongly. But the stock is now more expensive than when one sold, so most of those who sold on the break down, will not do anything now. The stock continues to rise and breaks up on the opposite side of the formation. Sellers at the resistance level of the formation are gone now, there is a lack of sellers and a buy signal has been triggered. What is special about this situation is that also the sellers below the floor of the formation are gone, so that there will be an even greater imbalance between buyers and sellers than with a normal buy signal. A further rise is indicated, and one has the possibility to sett a tight stop loss right below the ceiling of the formation.
Another way this can be explaned is that the news surrounding the company became negative, or less positive than earlier, at the break down through the formation. Many sell based on this fundamental information. However, this turned out to be wrong, because the news turns positive again and the price rises. That which seemed negative, was not so negative after all, and new positive impulses have come. The price break upward through the formation resistance and both sellers below the floor of the formation and at the resistance are gone. A powerful buy signal has been generated, and a further rise is indicated.

Score: The most important criteria for calculating score for this type of trading opportunity are wether the break up happens relatively quickly after the break down, wether the volume development is positive and wether the price is near the support in the ceiling of the formation. In addition the quality of the formation and the direction of the trend is taken into account.
Details

Trading Opportunity

Positive on Insider Trading and near support level


Theory: The Insiders in a company know a lot about the company, the market the company operates in and the future outlook. Maybe they even have better knowledge than analysts and investors that track the stock. When Insiders bet their own savings that the price will rise, and buy stocks in the company, this means they believe the stock to be fundamentally cheap. When the stock price is near a support level, this either means it has fallen back to a support, or that it has broken up through a resistance and given a buy signal. In both cases, the psychology of the market indicates that the price should rise further. When the stock is both fundamentally cheap (postive on Insider Trading) and technically positive, one has good chances to make a good investment.
Insider Trading score is only calculated for the medium long term, and only for the Norwegian and Swedish markets, so this trading opportunity only exists for the medium long term for Norway and Sweden.

Score: The most important elements in the calculation of the score for this trading opportunity are Insider Trading score, the strength of the support level and the distance to the support level. In addition the change in Insider Trading score for the last week, trend, formation and volume development is taken into account.
Details

 


Investtech guarantees neither the entirety nor accuracy of the analyses. Any consequent exposure related to the advice / signals which emerge in the analyses is completely and entirely at the investors own expense and risk. Investtech is not responsible for any loss, either directly or indirectly, which arises as a result of the use of Investtechs analyses. Details of any arising conflicts of interest will always appear in the investment recommendations. Further information about Investtechs analyses can be found here disclaimer. The content provided by Investtech.com is NOT SEC or FSA regulated and is therefore not intended for US or UK consumers.


Investtech guarantees neither the entirety nor accuracy of the analyses. Any consequent exposure related to the advice / signals which emerge in the analyses is completely and entirely at the investors own expense and risk. Investtech is not responsible for any loss, either directly or indirectly, which arises as a result of the use of Investtechs analyses. Details of any arising conflicts of interest will always appear in the investment recommendations. Further information about Investtechs analyses can be found here disclaimer. The content provided by Investtech.com is NOT SEC or FSA regulated and is therefore not intended for US or UK consumers.

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