The J-Hook Pattern is another example of being alerted when a gap up could occur. The J-Hook Pattern occurs after a trend has had a fairly strong run up. It backs off for a period, most likely profit taking. The stochastics do not get back down to oversold, they start leveling out and curl back up near the 50 area. As the price stabilizes and starts back up, the previous high becomes the logical target. This is the prime time to look for a gap up. The buyers, who saw the price have a strong move, then see it pull back, are now seeing it stabilize and try to move higher again. Once they become convinced that the sellers have been exhausted, the buyers will come back into the stock with confidence. This new confidence, the appearance of a gap, could be strong enough to breach the recent high and take prices up to new levels.
Figure 28 - D.R. Horton Inc.
D.R. Horton Inc. is an example of gaps playing an important part in recognizing when the next run-up will occur. Once the initial run up had run its course, the consolidation period or the hook area didn’t allow the stochastics to get down to the oversold area before turning back up.
The J-Hook Pattern is also a function of what the markets are doing in general. It is not unusual for the price of a stock to rise with the markets, pull back with the markets, then resume its uptrend when the market starts heading up again. But these stocks usually act with greater volatility than the market in general.
Identifying the J-Hook Pattern requires a minor amount of previous visualization. After seeing a major run-up in a stock price, then witnessing “sell” signals, makes for a good profit taking period. However, if an uptrend has been reasonably strong, without many zigs and zags, it is definitely profitable to keep monitoring that stock after the pullback has started. Depending on market conditions, considering that the stock is selling off but that the markets in general are still holding their own, it is worthwhile to check the progress of that stock for the next week or so.
After the “sell” signal and seeing that the stochastics have turned back down, the potential for a J-Hook Pattern to form is always there. About the third or fourth day, investigate to see if the stochastics are showing signs of leveling out. This may be occurring when the stochastics are in the 50 area. If so, watch for Candlestick buy signals forming. The signals will usually be smaller in size compared to a full-fledged bottoming signal. For instance, a series of small Hammers may form for a few days at the same price area.
This starts to flatten the trajectory of the stochastics. After this stabilization period, a small Bullish Engulfing pattern may appear. Buying in at this time produces two possible profit potentials. First, it is likely that the price is now going up to test the recent highs. This may be a 4%, 8%, or 10% move in itself. The second potential profit is breaking through the recent high and having a strong run up. A gap up at or near the previous highs indicates that the buyers are not concerned about the recent high acting as a resistance level.
Review the Tiffany & Co. chart, Figure 28a. After an extended uptrend, the stock ran into selling (profit taking) at the $30.00 area. It pulled back to about $27.50 when buying seemed to start supporting the price. It became evident that the selling had waned. As the pullback flattens out, it appears as if the buyers are starting to step backing at around $28.00. Buying at these levels gives the investor the potential to make $2.00, or about 7% profit over a three or four day period. As can be seen in this example, once the price got back to the highs, the stochastics had some juice left in them. At this point, watching the market direction in general should have been built into the decision of whether to liquidate or hold. If the market movement was stable to upward, then holding at the resistance level of the previous high would be warranted.
The gap up to a new trading range was evidence that the sellers were not going to stand in the way. Unless something severe is taking place when the gap up occurs, such as a severe drop in the market or a surprise announcement about the company or the industry, anticipate seeing the buyers continue to move the price higher.
Figure 28a - Tiffany & Co.
The J-Hook does not have to be a complete retracement to the recent highs to have a gap effect the break out. Note in the Monaco Coach Corp. chart, Figure 28b, how the gap up occurred prior to actually getting to the previous high.
Figure 28b - Monaco Coach Corp.
Hopefully the Candlestick investor would have been in the position after the Hammer signal. The gap up to new highs simply indicates that the high was not going to act as a lid on the price, giving buyers new impetus to take prices even higher
Figure 28c - Jones Apparel Group
Jones Apparel Group, Figure 28c, provides an obvious visual depiction of the prices gapping up at the previous high. The alert investor would have been in near the $26.75 level, upon seeing the Inverted Hammers slowing down the pullback.
Participating in the J-Hook Pattern usually requires being familiar with the price movement of a stock. It is difficult to write a search program that would encompass all the parameters describing a J-Hook Pattern. The easiest method for locating this pattern is to watch for an extended uptrend that is now in a pullback. The aggressive trader will want to get in as the pullback levels out. The more conservative investor will want to get in upon seeing a gap up as the trend is heading back up, especially if the previous high is within a reasonable range.
Being educated in Candlestick signals produces the extra advantage that other trading methods do not provide. This additional knowledge rewards you by illuminating profitable trade set-ups. You gain the benefits of always having profit potential that other investors cannot see. You can be racking up profits when the majority of investors are just getting what the market will give them. Even in difficult markets, you will be able to generate profits.
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