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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Springs and Upthrusts

What it is:

Springs and upthrusts are false breakouts that can trap the unsuspecting trader. Both patterns quickly reverse, with the stock or index then often testing 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 -- when prices temporarily break out above resistance only to retreat almost immediately after.

How it works (Example):

Springs and upthrusts are technical patterns named by legendary technician Richard Wycoff. The quality of the spring or upthrust can be judged by an examination of the degree of penetration of support or resistance, as well as the volume on the day or period 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, as it indicates there are few traders who are willing to sell 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. First, they can provide a stop loss, which should be placed just below or above the extreme of the day the spring or upthrust occurred. They can also create a target, since the stock is likely to test the opposite end of the trading range.

The recent upthrust in the Nasdaq Composite is shown below. The duration of the upthrust lasted for approximately one week. For most days during this period, the Nasdaq traded roughly two billion shares -- a bit higher than normal daily volume. Observe on the chart that the bearish engulfing candle signaled a key reversal. Also, note that the Composite was about to fall back into the consolidation pattern.

Why it Matters:

Being able to accurately recognize a spring or upthrust can turn a potential threat from a false breakouts into an opportunity. Swing traders should always watch the activity following a breakout to confaMACDm whether a stock is behaving as it should. If not, then it might still provide an excellent trading situation -- if you spot a spring or upthrust in the making.