Glossary & Trading Methods

This is the basic idea that in uncertain markets, either where volatility is high and the market can change direction very quickly, or where the market is bifurcated where certain market sectors are rallying while others are in sustained downtrends, one can adopt an approach that reacts to both long and short OWL set-ups that occur in real-time. In 2022, for example, we saw industrial metals rallying sharply during the year during the start of a bear market. So, taking a long approach to the industrial metals at that time while perhaps shorting other weaker areas of the market would be quite reasonable, and is therefore referred to as a 360-degree approach where one is trading in different directions at the same time, depending on the precise set-ups and the overall trend of the stock or other vehicle in question.

A basic OWL tool consisting of a five-minute chart with a 6-period and 20-period exponential moving average and MACD settings at (6,20,10,C). The chart’s name is derived from the two settings and includes both pre-open and after-hours data in the calculation of all indicators. A practical discussion regarding the use of the chart can be found  here: Tools of the Trade – the 620-Chart – The OWL Trader

Institutional, as opposed to individual investor, buying of a stock or the market in general. In the QE Era institutional accumulation has become less of an influence on price as algorithmic trading now dominates most of the daily activity.

A period of consolidation, or sideways price movement, following a price trend, be it an uptrend or downtrend. The consolidation forms as the influence of buyers and sellers equalizes, creating a sideways movement as the prior upside price movement is digested and consolidated.

A gap-up move that occurs in a similar position as a bottom-fishing pocket pivot. The rules for a standard buyable gap-up, as outlined in the book Trade like an O’Neil Disciple – How We Made 18,000% in the Stock Market can be applied to this type of gap-up move. As with a bottom-fishing pocket pivot it can indicate a turn off the lows and the start of a new uptrend. Such an uptrend can be of a short-term or more intermediate- to longer-term duration, depending on the general market environment within which it occurs.

A pocket pivot that occurs as a stock is trying to move up off a recent low following a significant price decline. Generally, a stock will bottom, move up slightly, as much as 10% or more, and then move tight sideways. It is at this point that a bottom-fishing pocket pivot can be watched for. In some cases, the bottom-fishing pocket pivot can help to identify a turn off the lows and the start of a new uptrend. Such an uptrend can be of a short-term or a more intermediate- to long-term duration, depending on the general market environment within which it occurs. The rules for a standard pocket pivot are discussed in detail in the book, Trade Like an O’Neil Disciple: How we Made 18,000% in the Stock Market by Gil Morales & Chris Kacher (John Wiley & Sons, 2010).

Financial cable TV stations like CNBC, Fox Business News, etc.

A buyable gap-up (BGU) is a powerful buy signal that should meet the following criteria:

1. Buyable gap-ups should occur in fundamentally sound and leading stocks, or there should be a compelling thematic basis for consideration.
2. A buyable gap-up move, in other words the height of the gap-up “rising window,” should be at least 0.75 times the stock’s 40-day Average True Range. In most cases, however, one can simply “eyeball” the gap as being of a substantial and powerful nature. Small gap-ups are not what we are looking for here.
3.  A buyable gap-up move should occur on volume that is at least 1.5 times the average daily trading volume.
4. Buyable gap-ups should occur within an uptrend or constructive consolidation, not while a stock is in a downtrend. In the case of a “bottom-fishing” buyable gap-up (BFBGU) the gap can occur coming out of a low base consolidation as a stock is trying to round out the lows of and recover from a prior intermediate- to longer-term decline.
5. A buyable gap-up should hold above the intraday low of the gap-up day, and one can therefore use the intraday low of the gap-up day as a selling guide.

This video explains a buyable gap-up in more detail: https://www.youtube.com/watch?v=j9cEvu_xOgA

A pullback of about 8%-12% in a trend, most often over a period of several weeks.

A basing pattern that resembles a cup when viewed from the side. Most cup-with-handle patterns last from 12 to 26 weeks (about 6 months). The typical correction in price from peak to trough is from 15% to 33%. The handle area should ideally be between 1 and 2 weeks in length and should not be more than 10%-15% deep.

Institutional, as opposed to individual investor, selling of a stock or the market in general.

A double-top short-sale set-up occurs when a stock has formed a cup type of formation that is V-shaped or of a more rounded shape. The basic characteristic is that the pattern has two distinct peaks. When the stock moves past the left-side peak in the pattern and then reverses back below that peak, a short-sale entry is generated using the left-side peak price level as a covering guide for a stop. One can use the exact price level of the left-side double-top peak as a covering guide or add 1-3% beyond that level to account for any porosity. Understand that whatever covering guide is chosen should be based on individual risk-preference – there is no perfect stop in any situation.

Double-top formations can last anywhere from 1-2 weeks to 1-2 years.

A base in which a stock’s price moves sideways for a minimum of 5-6 weeks (about 1 and a half months) and corrects between 10%-15% from its high. A stock that forms a flat base after a strong prior uptrend theoretically has the best chance of continuing higher after breaking out of the base.

A concept popularized by Bill O’Neil whereby the odds of a new uptrend in the market sustaining are increased when, on the 4th through 10th days of rally off a low, at least one major stock average advances by 1% or more on volume that exceeds that of the prior day. The best follow-through days allegedly occur on the 4th through 7th days of a new advance according to O’Neil’s studies, but OWL Methodologies do not employ the follow-through-day to any great degree as a predictor of market trends.

Forced selling is exactly what it says it is – selling where sellers are not necessarily choosing to sell, but where they are forced to sell. This could be due to margin calls as stocks come down, or it could be due to their own liquidity requirements. For example, if a large institution, like a bank or investment house, is suddenly beset with the need to raise cash on their balance sheet, perhaps due to capital requirements as asset prices (e.g., stocks) fall, stocks become a highly fungible asset. They can be sold quickly and converted to cash. This in turn can cause sharp downside breaks in the market as sellers rush to reliquefy by raising cash and can often build upon pre-existing selling trends. In a case of forced selling, the best place to be, of course, is on the short side of the market.

For a thorough discussion of this rule refer to the following article.

The late-stage failed-base (LSFB) short-sale set-up is a corollary of sorts to the head & shoulders (H&S) formation. The LSFB is usually seen more frequently than the H&S formation. As it evolves, however, an LSFB can often become the “head” of an overall H&S formation. The LSFB forms when a stock breaks down from a late-stage basea, which can happen after a failed breakout attempt or with the stock simply falling out of bed from a late-stage formation. The initial indication of a potential LSFB in progress is a breakout failure followed by a move below the 20-day exponential moving average.

A bear flag of any duration of two weeks or more.

This is where the stock fails badly, then forms an L-shaped pattern, holds tight, and then launches back above the 20-dema and/or 50-dma on volume. In essence, the L-shaped formation has the look of a short bear flag, but eventually fools everyone and resolves to the upside, such that the L-shaped pattern turns into a U-shaped pattern, hence the name.

Airbnb (ABNB) in 2023 is a good example of an L-formation that resolves not as a bear flag breakout to lower lows but as a move to the upside, turning the “L” into a “U.”

The point on the price chart at which price has the highest probability of moving higher; the point of least resistance. Often this corresponds to the high point of a base. The OWL Methodology, however, employs a broader definition of Pivot Point to include long set-ups such as pocket pivots and undercut & rally moves.

Punchbowl of Death. A large, wide, late-stage bowl type of pattern that forms in a big leader that has had a prior massive upside price move. Following the big price rise, the stock then breaks down and corrects sharply, creating the left side of the “punchbowl.” The decline is generally 11-28 weeks in duration. The rally up the right side of the punchbowl is generally of similar duration to the prior downside decline, typically 11-28 weeks, creates the appearance of a very deep “bowl” formation that is far deeper than the standard cup. However, such a rapid climb out of such a deep correction without any consolidation on the way up can leave a stock exhausted once it reaches its old high, which corresponds to the top of the right side of the punchbowl. In essence, the rapid rise following an equally rapid decline becomes unsustainable. Often, it will then break down completely and stay depressed for an extended period.

An abbreviated correction or pullback within an overall uptrend.

In a downtrend, reaction moves would occur to the upside as the overall downtrend remains intact.

The concept of measuring the price performance of one security vs. another over a specific period. Relative strength measures the performance of a stock vs. an index but can occasionally refer to the performance of a stock vs another group of stocks. A relative strength line can be plotted on a chart to easily show the investor the relationship between the two securities.

A price area on a chart that tends to act as a ceiling of resistance by making it more difficult for price to rise. In most cases it may consist of prior highs, thus would be referred to as price resistance, or a moving average where it would be referred to as moving average resistance.

A pocket pivot that occurs as a stock is coming up the right side of a base or consolidation as it tries to “round out” the lows of potential new base. A roundabout pocket pivot differs from a bottom-fishing pocket pivot in that it is occurring within the confines of what can be considered a normal base or consolidation, whereas a bottom-fishing pocket pivot will occur after a more significant price decline. The advantage of a roundabout pocket pivot is that it will occur within the base, well before a standard base breakout. Therefore, it serves as an early buy point that is not initially obvious to the crowd.

A shortable gap-down (SGD) can be thought of as the reverse of a buyable gap-up (BGU). In this case, there is a gap-down move that then sets a firm intraday  high and heads lower. This becomes actionable as close to the intraday high of the gap-down day as possible. The intraday high then becomes a covering guide. This is the reverse of a BGU where the intraday low of the gap-up price range becomes your selling guide.

A shortable gap-up (SGU) is simply any gap-up move that plays out as a short-sale entry. The entry may occur as the stock gaps up into double-top or moving average resistance and then reverses. In some cases, use of the five-minute 620-chart can assist in a short entry.

A price area on a chart that tends to act as a floor of support, making it more difficult for prices to fall. Support can occur at prior price lows or at the top of a prior consolidation or price range, either of which would be referred to as price support.

Support can also occur at a moving average, which would be referred to as moving average support.

This refers to when the market and leading stocks bottom out and then suddenly move back to the upside, usually at the point where they achieve maximum ugliness, so to speak. This has brought into play a variety of new long technical set-ups that have proven to be far more efficient and effective than buying standard base breakouts. These include the undercut & rally (U&R), which is derived from the “Wyckoff Spring” first identified by Richard D. Wyckoff. Its corollary, the moving average undercut & rally (MAU&R), and the more standard “Wyckoffian Retest” or “test for supply” are other Ugly Duckling set-ups that I discuss in TheOWLTrader.com.

This is described in detail in the book, Short-Selling with the O’Neil Disciples and indicates a technical condition where a stock is in a decline and moves below a prior low in the pattern. The crowd will view this as an obvious “break of support” at which point natural sellers will be washed out and short sellers will swarm the stock. This ends up fooling the crowd, and the stock will then rally back to the upside. This is also known as a “springboard” in the writings of Richard D Wyckoff. When selling short, I often use an undercut of a prior low in the pattern as a point at which to cover my short and take profits.

Note that Jesse Livermore’s “Shakeout-Plus-Three” rule, which is described in detail in Chapter 5 of his book, How to Trade in Stocks is based on a particular type of “undercut & rally” move. Livermore’s rule would be triggered by the following conditions: 1) a move by a stock below a prior low but not more than three points lower, and 2) a rally by the stock back to the upside that carried at least three points above the prior low. For Livermore, a Shakeout-Plus-Three buy set-up was another type of “pivotal point” indicating that a stock in decline was turning back to the upside.

William O’Neil has taken Livermore’s Shakeout-Plus-Three rule and altered it into a “Shakeout-Plus-N” rule where the N = a specified number of points based on the price of a stock. Thus, while a stock trading at 60 might use a Shakeout-Plus-Three rule where N = 3, a stock trading at 120 might use a Shakeout-Plus-Six rule where N = 6. In most cases N is usually equal to approximately 5-10% of the stock’s current price as IBD cites it, although I find this to be far too imprecise for my purposes.

The undercut & rally, or U&R, is based on Wyckoff’s spring formation, and replaces the arbitrary and imprecise Shakeout + N nonsense. In fact, the U&R is a very simple OWL long set-up. Once the stock undercuts a prior low in the pattern and rallies back above it, a long entry is generated at the prior low which is then used as a selling guide. It is similar to Richard D. Wyckoff’s “Spring” formation. Volume is generally not a factor, and often the best U&R set-ups in individual stocks occur in conjunction with a market turn to the upside after a period of correcting.

Sometimes the U&R can occur on a more macro-level, as the weekly chart of Roku (ROKU) in 2018-2019 shows.

A voodoo (OWL slang for VDU, or volume dry-up) pullback occurs in a leading stock that is pulling into a logical area of support, either at a key moving average like the 10-day, 20-day, or 50-day moving average, or the top of a prior base. Volume on a voodoo day is less than -35% to –45% below average or more, although it can also be measured contextually relative to the volume seen on preceding days on the chart.

My custom HGS Investor Software chart view makes t easy for me to spot VDU or Voodoo volume dry-ups in real-time.

A technical set-up where a stock makes a low, rallies off that low, and then pulls back slightly to retest that initial low without undercutting that low as volume dries up. This is also known as a “test for supply” as the stock backs down towards the prior low but does not hit it as selling dries up. The volume decline on the pullback indicates a lack of supply as sellers fail to hit the stock again.