One of the things that peaked my interest in point and figure charting was the ability to back-test certain chart patterns and various charting disciplines that are found in the point and figure craft to help me further understand how the "laws" of supply and demand can impact stock price action.
In this morning's 09:00 Update, we uncovered a potential bearish signal reversed pattern in Intel (NASDAQ:INTC) $28.67 -2.4% that could unfold should the stock trade $32, but that trade does need to take place before a trade at $28. I need to point this out because a trade at $28, would have the chart of Intel (INTC) reversing back into a column of "O" and then negating the potential of a true "bearish signal reversed."
Let's take a look at a stock that many people are familiar with and try to get a better grasp of the "bearish signal reversed" pattern and its potential impact on stock price action.
On January 15 of this year, shares of Wells Fargo (NYSE:WFC) $52.88 -0.62% jumped higher on strong volume to the $45 level and triggered the "bearish signal reversed" pattern on its point and figure chart. Even some bar chartists may have not knowingly witnessed the powerful dynamics taking place as the stock broke above its 200-day moving average on volume of 15.6 million shares. There were many technicals that came into play that day that hinted the MARKET had just taken a more bullish posture toward the stock. For bulls, it's been a pleasant experience this year as the stock has gained roughly 17% since giving the bearish signal reversed pattern.
Wells Fargo Chart - $1 box
While perhaps labeled "boring," Wells Fargo (WFC) $52.93 has treated bulls well since giving a bearish signal reversed pattern at $45. The long column of X that has developed also gives longer-term bulls a feeling of further bullishness as the vertical count has grown to $84.
WFC versus S&P 500 Relative Strength Chart
It is interesting to make the "tie" between the "red 1" in the point and figure chart of WFC and the "red 1" in the relative strength chart of WFC versus the SPX. Together, a trader/investor was getting some confirmation that bullishness was at hand and that demand was starting to take control of the stock.
Now, this is a good example of the bearish signal reversed how relative strength can help give some confirmation to things.
But lets not forget something here. Isn't Wells Fargo (WFC) a bank? What is all this "talk" that the weakening U.S. Dollar is doom for the economy? If that's the case, then should banks become extremely vulnerable to such a scenario? I would think bankruptcies and bad loans from such a scenario would surely have a banking stock like Well Fargo (WFC) trading at new lows, not breaking to new 52-week highs. What's up with that?
Yes, I know. It will eventually happen. Ok then, monitor things going forward, but if a bear was caught short at $45 in WFC on the bearish signal reversed and still holding short, you can be he/she is "hoping" for some type of some double-dip recession scenario unfolding.