A few weeks ago I grabbed this chart of U.S. Steel (X) to place in my personal trading journal. I'm not entirely sure, but I also believe I posted it on Facebook for all of my friends and followers to see. At any rate, as the chart of U.S. Steel (X) shows, a very powerful price advance was enjoyed from early November to the middle of December. However, I knew that the move up was just about done for a while. And here is how.
Fuel for the Fire
Note how most of the bars during the advance were small in size. No bars qualified as "wow" bars. No single bar really ever ignited grand feelings of excitement. They were good, but in a normal kind of way. This type of rally, one fueled by small, controlled bars, can run for a very long time. Think about it. Nothing get's overdone or overheated in a rally like this. The buyers are rationing their money into the stock ever so gradually and slowly, which makes it last longer.
Chicken Feed
Imagine for the moment you are a young, Frank Purdue. On a visit to your chicken empire, you notice that one of the groups of chickens seem hungry. You grab a handful of chicken feed. Now, you can sprinkle it amongst your chickens very sparingly or open your entire hand and allow all the feed to be dispensed all at once. If you do the former, you will wind up feeding your chickens over a longer period of time. If you do the latter, you will use up all your feed very quickly and won't be feeding your chickens very long. Granted, the amount of feed will be the same, but the duration of time spent feeding is different. And therein lies the rub. In short, a rally fueled by little bars means the bulls are feeding (buying) sparingly but steadily. Once the bars begin to grow in size, you know the hand that is feeding the rally has begin to open wider and the feed will be gone sooner rather than later.
Now, look at the last bar on the chart above. Note how the bar grew in size, over and beyond the average size of all the bars that made up the rally before it. That is when you know the feeding frenzy is nearing an end. Bars can be happy at the start of a move, but when the bars become too happy (big) after an already established move, it's close to be over. Take a look at what happened next.
Charts are the footprints of money. Someone very brilliant said that in a book entitled, Tools and Tactics of the Master Day Trader, back in the mid 90s. If this is so (and it is), then the size of the footprints/bars mean a great deal. In short, size does matter. Don't let anyone make you think otherwise. So on your next hunting trip to find your next score in the jungle we call the market, keep this lesson in mind.
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