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After another great week of trading, I wanted to take this opportunity to walk you through some of the technical developments that helped lead me to believe that shares of Clover Health Investments Corp (CLOV) could surge at some point.

Clover Health Investments Corp. is a healthcare technology company. It uses its proprietary technology platform to collect, structure and analyze health and behavioral data to improve medical outcomes and lower costs for patients.

Clover Health Investments Corp., formerly known as Social Capital Hedosophia Holdings Corp. III, is based in California.

When combined, volume and momentum form a powerful leading indicator team

Let’s face it, these days there are way more technical indicators than anyone will ever need.

When it comes to trying to identify potential turning points within a trend, you’d be surprised at how many professional traders stick to a small selection of tried and true indicators.

More often than not, this list usually includes one momentum indicator and one volume indicator.

And just a few moments, I’ll share with you what those indicators are, one of my favorite setups to trade, and a complete breakdown of my CLOV trade.

OBV helps traders identify when shares are being accumulated

When it comes to winning trades, most start with a sound foundation.

And when we’re talking about price action, a strong foundation usually develops when the stock undergoes a healthy change in positioning.

Specifically, this means that the stock has recently witnessed a “cleansing of the system,” where shareholders with losing positions sell their shares to a new pool of traders and investors that have been patiently accumulating those shares.

There are a few tools that can help traders decipher if shares are being accumulated during a sell-off.

One of the more popular methods that I’d like to discuss today is an indicator called On Balance Volume (OBV).

Click here to learn more.

Simply put, what this indicator allows traders to do is look at the net buying or selling that has been taking place.

Like many technical indicators, when divergences form between price and this complex volume indicator is when the magic happens.

Here’s what I mean.

Figure 1 below shows a chart of CLOV over the past 3 months with the On Balance Volume indicator in the bottom panel.

Figure 1

You can see from the chart above that as the stock was making new lows on August 19th, the On Balance Volume indicator was making a higher low, indicating that there was positive cumulative volume flowing into the stock at that time.

Momentum helps traders identify when a trend is slowing

Remember, it’s always best to have confirmation of a trading signal from more than just one indicator.

For decades, momentum has always acted as a powerful complement to volume signals such as the one shown above.

In the case of CLOV, both the RSI (Relative Strength Index) and MACD (Moving Average Convergence Divergence) momentum indicators were also making higher lows when shares were making lower lows on August 19h.

This can be seen in Figure 2 below.

Figure 2

Patterns that form after favorable volume & momentum signals offer a higher probability of success

Remember, hindsight is 20/20.

Therefore, in real time the above-mentioned divergences from both volume and momentum on August 19th could only have been viewed as providing improved odds that, at a minimum, the downside had become significantly limited for shares of CLOV.

Let’s face it, for beginner traders, entering long positions when a stock’s price is collapsing to new lows, as was the case on August 19th, is not easy.

Heck, it’s not even easy for a lot of professional traders.

In situations like this, a trader can be patient and wait to see if any recognizable patterns develop in the days that follow positive momentum and volume signals, before committing with a bullish trade.

In this instance, traders that may have had CLOV on their watch list would have seen the stock develop a “bull flag” pattern above new support from the formerly resistive 34-day moving average during the second half of August (see Figure 3).

Figure 3

This is precisely the pattern I was watching, and when combined with the share accumulation and downside momentum deceleration signals I highlighted earlier, I was provided the confidence necessary to commit to the idea that shares could surge to at least reach the “bull flag” target of $10.25, which was surpassed this passed Tuesday.

Author:
Jason Bond

3 Comments

  1. I needed to thank you for this excellent read!! I certainly loved
    every bit of it. I have you bookmarked to look at new stuff you post?

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