Let’s look at a measured move on Palo Alto Networks (PANW) that bRobert, (one of our swing traders) spotted today. (January 15, 2019)
PANW
Here’s our Chart of the Day on Palo Alto Networks ( NYSE: PANW ). This is a stock that bRobert who is one of our swing traders in the forum was looking at today. He called out a measured move to about 220.00 and so I wanted to explain how that works.
This is a head and shoulder pattern. Here’s a low, a lower low and then a higher low. This is something that a lot of people don’t really realize, they don’t think about it, in order for a head and shoulder pattern to be a reversal pattern there has to be something to reverse. Here we definitely have a downtrend that ultimately came all the way down to here. We don’t KNOW this is a head and shoulder pattern, frankly, until it breaks out here.
We just know this; this is a downtrend from 240.00 down to about 160.00. I would say giving away a third of a market cap pretty much qualifies as a downtrend, definitely a bad patch to go through. Then you get a move higher, it fails at this top and then a move lower, which finds support at a higher level.
Now you have got, left shoulder, head, right shoulder, obviously this person is a gymnast standing on his head. We still don’t know much until the stock, and it kind of faked us out there, and then ultimately just broke out last week. It finally came back to where this was the high; this was the high, boom, and now a higher high. So this broke out and now we have a completed head and shoulder pattern.
Now to complete this picture, at some point the neckline can be tested, that would be called a throwback move. We don’t know whether that is going to happen; shoot sometimes these things just scream. Other times it fails the test and goes down to 2; we don’t know. But if the stock does happen to pull back, look for support around 190.00. If support is NOT there then you absolutely do not buy the stock, just don’t, it’s a failed head and shoulder pattern, at least not at that particular point.
That is not what I am looking at here. What we are looking at is this: We get the low here at 160.00, and then where is the neckline? The neckline is up here at 190.00, that’s $30.00. So we take that $30.00 difference between the head and the neck, that’s $30.00 then we add it to where the neck is. Again, that’s 190.00. You don’t have to be so precise; 190.00 plus 30.00 magically is, this isn’t new math, you’ve got this, just shout it out, just yell it out if you know it. That’s right, $30.00. So it comes up to $220.00, that would be our measured move on this stock.
You use this for the purposes of risk management, of deciding, okay if I want to buy this stock and it still has to clear the 200, but if I want to buy this stock what do I expect out of this? I might have to risk 4 percent or so. if I am buying here I am not going to ride it all the way back down but maybe I will put a stop a little bit below today’s intraday low or maybe below yesterday’s intraday low, so I will put a stop right here. I don’t even want to mess around with the neckline, I am eager to cap my losses so I put a stop down here at 192.69. So what’s that’s? That’s a 3.5 percent risk.
So what’s my upside? Well, this is where the measured move comes in to play, so you are risking that much. Yet from here you have the possibility of making 9.5, about 10 percent on the trade. This would be a good risk/reward trade. That’s, I think, what I what Robert was looking at here and so I just thought I would pass it on to you.
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