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RIM, Nokia, and Vivus Case Studies: Don't Blink or You'll Miss the 'B' and 'C' Waves

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Learning to spot the pullback during this seminal event period and pouncing is crucial to making big money in the market.

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The work at my firm centers around a combination of fundamentals and catalysts, and crowd behavior. Yes, it's crucial to understand herd mentality if you want to consistently enter profitable swing trades at the right time and price. The seminal event is analogous to what is called "the tipping point" in a new development stage of a company. Learning to spot the pullback during this seminal event period and pouncing is crucial to making big money in the market.

This seminal event trading pattern I often call the ABC pattern, and we are looking to get long during the "B" wave portion of that 3 wave rally. This B wave is where you get a combination of traders taking profits from the A wave rally as it begins to fade a bit. Along with those profit-takers come the late stage buyers who chase price action and therefore often fail in their trading. They often end up stopping out as the B wave progresses, or they get margin called as the B wave decline takes hold.

If you want to become a better swing trader, learn to be patient and do not chase the A wave rally. Often a tipping point development is announced and a spike rally ensues; then the buzz picks up online and traders come in and chase the top end of the A wave spike. What you want to learn is to sit on your hands and let the gas run out of the A wave, let the B wave pullback begin... and then slowly scale into your position as traders exit out, not believing the move up will hold.

Examples of this are Research In Motion (NASDAQ:RIMM), Nokia (NYSE:NOK), and recently Vivus (NASDAQ:VVUS). We played RIMM and VVUS at my firm and recommended it to our subscribers during the B waves. All of those companies were in the down-and-out mode and sentiment was negative, but then a seminal event took place that sparked an A wave rally to the upside. The early traders rightly take their profits quickly, leaving scraps for the chasers. The chasers end up taking losses during the digestive period of the B wave consolidation, which takes many forms on a chart. The smart money then aggressively accumulates the B wave consolidation and profits from the C wave, which can be 150%-260% bigger than the A wave rally. It's where the crowd really catches on in a light bulb moment of recognition that this time things are in fact changing fundamentally for the company in question.

Below are some samples of the ABC pattern.


Click to enlarge

Learn to recognize those seminal events where the A wave rally takes off, avoid chasing it, then pounce and scale long on the B wave correction.

Twitter: @activetrading

Editor's Note: David Banister is the chief investment strategist and co-founder of ActiveTradingPartners.com, a small-cap portfolio and market advisory service.

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No positions in stocks mentioned.

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