CSI: Chart Scene Investigation. (Case Study: ORLY)
See how technical analysis solves the mystery of a market's future price action.
by Nico Isaac
Updated: November 28, 2017
If financial markets were crime scenes, there’d be two options for traders:
- Doing a post-mortem to find the causes of major trend changes, after the fact
- Or, having an arsenal of clues that hint to those trend changes, before they occur
Without question, the second scenario is the most desirable one. So, how do you get it?
Well, we can tell you. Or, we can show you, using the recent price history of a popular auto parts retailer, O'Reilly Automotive, Inc. Let's begin.
In the first half of 2017, O'Reilly, whose logo is a shamrock, lacked the luck of the Irish, to say the least. Between February and July, the company's Nasdaq-listed stock, ORLY, plunged 30% to its lowest level in three years.
At its lowest point, mainstream analysts donned their detective caps and surmised several fundamental factors for the stock's beating, including rumored price-matching wars with Amazon, lower-than-expected sales figures, and even a "mild winter." Explained one industry official:
"It is simply a reality that over short periods of time, the single most significant factor that drives variability in our business is weather." (July 28 Springfield News-Leader)
There it is. "Crime" -- or in this case, price collapse -- solved.
But what about seeing the clues for that collapse way before it took place? Here, we turn to our master of technical analysis Jeffrey Kennedy and reopen the case file on his January 24 Trader's Classroom webisode.
There, Jeffrey identified a price configuration popular among market technicians on the chart of ORLY -- a head-and-shoulders pattern. Jeffrey warned that "once prices took out the neckline" (likely in March, April or May) we'd have the necessary confirmation of a major downtrend.
Jeffrey then used a neckline measurement to identify a minimum price target for the subsequent decline at 210.
From there, ORLY indeed took to the downside, prompting Jeffrey to revisit the stock in his April 11 Trader's Classroom. There, he reiterated the neckline measurement as being "the minimum objective" for the sizable decline to come.
The chart below plots the timing of Jeffrey's Trader's Classroom forecasts alongside the price chart of O'Reilly.
You can also hear Jeffrey walk traders through his bearish analysis of O'Reilly in the video compilation below of the January 24 and April 11 Trader's Classroom webisodes.
Press play and enjoy!
When it comes to the world of financial markets, there's only two possible scenarios for traders: Solve trend changes after they've already occurred. Or, prepare for those changes in advance. The choice is yours.
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