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EV Energy Partners- A Chart Analysis

EV Energy Partners- A Chart Analysis
April 26
03:33 2012

Here is a 15 minute chart snapshot of EV Energy Partners (Symbol: EVEP) spanning Monday, March 26th, 2012 to Friday, March 30th, 2012. The shaded areas are the afterhours market trading. This chart includes several technical indicators:

  • 8 period simple moving average (blue line)
  • 20 period simple moving average (red line)
  • 200 period simple moving average (green line)
  • Bollinger Bands (purple lines)
  • Relative Strength Index (RSI) (dotted line)
  • Volume (dark blue bars)

The Walkthrough

No single day is special in and of itself, even if you are a day trader. Understanding this principle helps the professional trader take a broad look at the overall instrument that is being traded. If the instrument has very little follow-through or a sideways moving pattern on a particular day, it doesn’t mean that the instrument will not be tradable the following day.

As instruments make new highs or new lows they go through cooling off periods. This cooling off period can come in many forms but the most common looks like sideways movement or an area of consolidation. After this period of consolidation the market can continue to move in the direction of the previous trend or can find support or resistance and reverse the trend.

In this example of  EV Energy Partners, this downtrend began on Tuesday when the price made a new high and then broke below the 200 period simple moving average. By Wednesday the market enters sideways consolidation or a cooling off period, before it decides to make another move down the following day.

Although the market is still in a downtrend, Wednesday offers very little opportunities to trade the instrument. Understanding that Wednesday is only a cooling off period following the downtrend on Tuesday helps the trader have more patience and avoid trading the symbol that day.

By Thursday the market is ready to continue the downtrend as the previous day of consolidation is over. On Thursday the market makes a new low and begins to trade higher towards the close of the day.

Most instruments, after making a new low, will begin to trade higher as many investors see the bottom as a cheap place to buy stock. Traders should continually be assessing the amount of follow-through, the clarity of trend, and the size of pullbacks.

The Lesson

The movements in a single trading day should be looked at in connection with the overall performance of the instrument for that week. Therefore a trader’s strategy should reflect an understanding of what is going on in that week. Understanding the larger trend of the week will help the trader benefit daily from the instrument, even if the benefit means that the trader will avoid trading an instrument on a pullback day.

This lesson is harder to grasp for day traders as they seek daily profits from any given instrument but having a bigger perspective can help traders avoid trading an instrument on a pullback day or on days the market is cooling off and trading sideways.

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