I heart scallops

My favorite chart setup

The goal of charting stocks is to find the easiest way to make money.  Generally, we want to find stocks under accumulation by large holders.  We then want to see rest periods where the large holders have little to no interest in selling, so we can hop on and catch the next lift up. 

Seems simple, right?  It can be, if you know what you’re looking for.  The pattern I’m examining today is called a scallop.  However, I use specific filters for this pattern to assure quality.  These patterns are hard to find.  When you find them and nail the trade, they’re worth all the work.         

The first pre-requisite of the scallop is months of clear accumulation and significantly rising prices (at least 30%).  After the rise, we want to see a price kind of stall out and trade sideways with a slight to gradual downward drift for a few months.  (charts courtesy of stockcharts dot com)    

There are two features that tell you this is a scallop.  First, there is a falling resistance line acting as an upper boundary on price, while the lower boundary is a bit of a rounding turn.  The rounding action is KEY because it tells you that the supply and demand balance has shifted. 

A couple notes on the turn:

-         ---When price starts to round look for increased volume.  This is another sign of accumulation.    

-          ---After the turn has been identified use the low as a stop area. 

-         ---  You want to enter as soon as the falling resistance line clears

 Recently, this pattern has hit for some big wins.  I nailed OPK & CAMP (but sold out much too soon) and tweeted them in real time on stocktwits. 

OPK is a great example of what happens when a quality pattern is supported by a small float and a lot of short sellers.   After the breakout around 4.60, it gained 50+% in 6-7 weeks.    

CAMP was a shorter pattern, but also highly efficient, quickly gaining 30+% from the buy point to the highs in 5 weeks.  Also note how the bottom came at a prior resistance level. 

A scallop currently playing out is CERS.  It rose 11% Friday on great volume after its earnings announcement.  This time we have clear resistance levels to shoot against.  Also, the short ratio of 31 suggests this could run another 20-40%.  Please note, I have no position and I’m not saying buy it here.  Do I think it’ll go higher?  Yes.

Lastly, you’re probably wondering why I have not mentioned targets.  Well, it is my experience often these gains come so fast you find yourself selling before they stop!  Thanks for reading.  Don’t let people tell ya you can’t time stock picks!! Happy Trading!