Here’s a great little tactic that you can put in your toolkit of trading knowledge to help you with exits.
This isn’t built into our system in exactly the same manner although it’s similar to the system generated Parabolic Stop which you will see kick-in under similar circumstances.
The Price Volume Crescendo gives you a little signal that things are very parabolic on the daily timeframe and statistically the odds will be in your favor to go ahead and close out the trade.
On a daily chart we’re using a plain old 5-sma (simple moving average) of the close, and then you want to add a 3-sma of the High.
When you spot this technical pattern it gives you a little extra edge and helps you know when it’s a good time to lock in some profits and it can help fine tune exits on stocks that are nearing the end of their swing cycle.
There are 3 things that will occur that tell you it’s a good time to exit or take half off the table.
1) The Low of a daily price bar is higher than the 5-sma
2) The Close of that same day is above the 3-sma of the High
3) There is a gap-up the following morning at the market open
Here are the rules.
Let’s say you took an entry down towards the left hand side of the above graph and you have several (or more) days of price run-up in your favor.
When you see a day where the low is above the 5-sma and that day’s close is over the 3-sma of the high, keep an eye out for a gap up the following morning above the previous days high. Then just sell at the open. That simple.
One additional little trick to help squeeze a little extra out of the trade is to protect the gap-up low on a 5-minute intraday chart. If the price keeps climbing you just trail the stop under the low of the previous 5-minute bar.
Why this works.
What you’re going to find is when you have this Price Volume Crescendo pattern, more likely than not, either that day the stock will sell down and you got out right at (or near) the high – or the following day you’ll often see a reversal and the start of a pullback. At the point of the Price Volume Crescendo the stock is simply overextended.
If you look at the volume on the chart you’ll typically see the volume increasing on that day (1) where the low stays over the 5-sma and the close is over the 3-sma of the high. That’s your first indication that the stock may be approaching a selling climax. Then you want to watch closely for a gap-up the following day.
One thing to keep in mind is that you’re not going to see this on every single trade but when the pattern does show up on a stock you’re holding it makes sense to lock-in profits.
This is a similar pattern to what often turns out to be an exhaustion gap – and when you see it there’s a high likelihood that the move is over. Now you will have a strategy for spotting it.
Here’s something important to keep in mind with this pattern.
Remember that we are looking out for this pattern after a run-up in price, not at the beginning of an up-move such as one that starts with a positive earnings release.
A “gap and go” move on a stock usually occurs at the beginning of a swing cycle. When you’re at the end of the swing cycle a Price Volume Crescendo pattern frequently ends up as an exhaustion gap since the price is already way overextended.
You’ll see different variations of this type of pattern and in some cases you’ll be in a stock that gaps way up at the open and you can use this tactic to take your profit up near the highs of the move. In other cases maybe the gap isn’t that large of a percentage and the stock will continue to move higher, but this is just one way to help identify stocks that are likely to reverse or stall out.
One cornerstone of our trading system is that we look to pull half off the table at our Target – or the Parabolic Stop – and let the other half ride using the System Trailing stop.
The Price Volume Crescendo pattern generally occurs around the same area as the Parabolic Stop and both are excellent places to lock-in partial gains, or just close out the trade and move on.