REPOST of A-B-A2

This was originally written up on Monday June 2. The video version is found here:

The A-B-A2 Pattern - Online Video Tutorial

The written version from the Monday June 2 post is here:

Frequently, a pattern occurs which has been referred to in this space as an “A-B-A2” action. As this blog gains a bit of a following, this pattern- particularly in this market- should be explained further. Many times, a stock which has major news whether it be earnings, the resignation of an officer, or anything else, a stock will gap significantly higher or lower from the previous day’s close. For instance, Costco (COST) opened up about 60 cents from the close at 73.83 on the day it reported earnings (Thursday May 29). This open would be point A. The stock fell to a low of 73.28 shortly thereafter (point B). When the market began rallying that morning, the stock went back to 73.83 (second time at point A, i.e. A2). Within a couple of minutes, the stock rallied 80 cents from 73.83. Many many times, this pattern works. The reasoning for this is as such- continuing to use COST as an example- the stock opened higher on respectable earnings, fell as some people got rid of their shares, but immediately turned on a decent up day for the market. When it got to its opening level, many people who were short got nervous and covered as they did not want to hold through the previous high of the day. Thus, the stock spiked back through its opening level. About an hour or so before the market opens, it certainly is not a precise science to figure out the exact numbers at which this type of action will occur; however, it does occur a lot. So, hereafter, make this A-B-A2 pattern your friend; it is one of the major tools used in effective day trading.