UNDERSTANDING SPRINGS AND UPTHRUSTS IS A TECHNICAL ANALYSIS MUST

When is a break of support bullish and the breaking of resistance bearish? When these events turn out to be either springs or upthrusts, the name given to these technical patterns by legendary technician Richard Wycoff.

Both springs and upthrusts are examples of false breakouts and can trap the unsuspecting trader. Both patterns quickly reverse and the stock then often tests the opposite end of the trading range. A spring is a false breakout to the downside. It is so named because prices "spring" back. An upthrust is the opposite event--prices temporarily break out above resistance only to retreat almost immediately after.

The quality of the spring or upthrust can be judged by an examination of the degree of penetration of support or resistance and the volume on the day this penetration occurred. These four scenarios are possible:

-- Large penetration on large volume
-- Large penetration on small volume
-- Small penetration on large volume
-- Small penetration on small volume

For a spring, a small penetration on small volume is bullish since it indicates there are few sellers who are willing to give back their shares below support. For an upthrust, a large penetration on large volume is bearish because it shows that the bulls could not sustain higher prices despite the activity.

Springs and upthrusts both provide the swing trader with good opportunities. A stop loss can be placed just below or above the extreme of the day the spring or upthrust occurred. A target is also created since the stock is likely to test the opposite end of the trading range.

A good recent example of a spring occurred in the stock of Linear Technology (LLTC, $36.22). Since June, LLTC has been in a rectangular trading range with resistance at $40 and support at $34.50. Despite this consolidation, however, the stock, like most semiconductor shares, has been trading below a declining 150-day moving average characteristic of a stage IV decline.

On Wednesday, LLTC broke support trading down to an intraday low of $34.01 before recovering near the close to end the session at $34.50. The candle was a high wave, with a small real body and large upper and lower shadows. High wave candles indicate a war between the bulls and bears with neither side being able to claim victory. Volume on the day was about 7.5 million shares, about 50% larger than normal. I would classify this session as a small penetration on large volume. It made the stock worth watching in the following sessions.

On Wednesday evening, Texas Instruments held its mid-quarter update. Although its forecast was not that strong, it served as a catalyst for what appears to be a violent short-covering rally in beaten down chip stocks. LLTC rallied with the group and finished Friday's session at $36.22, springing back more than $2 from Wednesday's low. The stock is now challenging a downtrend line from its late July high of $39.74. If it can break that trendline, a movement back into the upper end of the trading range near $40 appears likely.

A knowledge of springs and upthrusts turns false breakouts from threats into opportunities. As a swing trader, you should always watch what happens after a breakout to confirm the stock is behaving as it should. If it isn't, the issue may still provide an excellent trading situation if you spot a spring or upthrust in the making.

Good trading!

Dr. Melvin Pasternak
Editor
The StreetAuthority Swing Trader

If you have not yet tried my weekly trading newsletter, then you can begin your training right now by signing up for a FREE three-week trial to the StreetAuthority Swing Trader. Sign up today and you'll also receive a complimentary five-part swing-trading course -- "Swing Trading Done Right: The Secrets to Putting the Odds in Your Favor." Please click on the link below to receive my newsletter absolutely FREE for three weeks -- https://www.StreetAuthority.com/freetrial-st.asp

We offer this trial to you completely hassle-free. We do not require any credit card information from you and we will not share your name or email address with any third parties. Moreover, should you choose NOT to subscribe to this newsletter at the end of your FREE trial, then simply do nothing -- we will cancel it for you. With this in mind, we invite you to sign up for a FREE trial to the StreetAuthority Swing Trader. Sign up today!

https://www.StreetAuthority.com/freetrial-st.asp

Who Cares What the Market is Doing When You're Pulling in $28,900 a Year in Dividends? With the safe, growing, high-yield picks that Editor Carla Pasternak recommends every month you don't have to worry whether or not the market has bottomed. You can sit back and collect annual dividend paychecks of $16,300, $19,900 or even $28,900! You can't go wrong looking into Carla's recommendations. A year from now, when you've collected as much as $28,900 from dividends alone you'll be glad you did. Take the first step and, read this report now. Seven "Yield Doubler" Stocks That Are Clobbering The Dow Just 12 trading days before the market hit its 6,500-point low this year, the "Yield Doublers" portfolio was born. That was almost 4 months ago. The Dow has rebounded +12% since then -- but our seven "Yield Doublers" have clobbered that figure by a factor of up to 9-to-1... delivering up to +144.2% gains to boot! Go here to see why you should add these "Yield Doublers" to your portfolio today.

We're Putting $50,000 on the Line in Our NEW Stock of the Month Portfolio We're SO confident in this strategy that we're putting our money where our mouth is... $50,000 worth of it in fact! That's how much we've put into a brokerage account to fund the real-money portfolio for StreetAuthority Stock of the Month. Amy Calistri just made her first purchase, and it's not too late for you to join in and follow along with everything she does. Don't be left on the sidelines, click here to learn more now. Two Infrastructure Stocks That Are Profiting From Massive Government Spending Since the stimulus package was signed into law on February 17th, these two infrastructure picks have moved up quickly. One's a worldwide construction company that's already gained +32% to date. The other makes critical copper, aluminum and fiber optic cables... and shot up +41% in a matter of just weeks. Both are headed higher. You’ll find their names in this special report.