There are a multitude of technical patterns out there, but one that I’ve found that works consistently is the pinball stock pattern. It might sound odd to anyone who plays pinball, assuming that there’s no real pattern to playing the silver ball. But there is a visual basis for where this stock pattern gets its name. Imagine a pinball falling, being hit back up with the bumpers, and falling again. This is the pattern the stock takes: falling, rising slightly, and falling again.
Traders who identify this pattern can purchase stock as it falls and sell as it rises. Trading the pinball strategy can be tricky, though, since pinballing occurs during a downfall. If you purchase at the wrong time, you may miss the temporary surge that defines this pattern. While the pinball strategy doesn’t always work, it is a simple technical pattern worth looking for.
Pinball Chart Pattern Explained
To identify whether a stock is exhibiting a pinball stock pattern, you first need to see the stock in a definable downtrend. Specifically, you want to see the 8-period exponential moving average below or equal to the 20-period simple moving average. Additionally, the 20-period simple moving average (SMA) should be below the 34-period exponential moving average (EMA). Moreover, the 34-period EMA should be below the 50-period SMA, which should be below the 200-period SMA.
Next, the stock should be forming a bottom. Thereafter, you want to see if there is a gap of more than 10% between the 8-period EMA to the 34-period EMA. Following this, the previous day’s close must be above the 8-period EMA.
After all that, you would buy on positive trading above the 8-period EMA.
Here’s an example from the daily chart on the iShares NASDAQ Biotechnology Index Fund (IBB).
In this chart, all of the moving averages are properly aligned (shorter moving averages are below the longer ones in sequence). It extends out to the 34-day exponential moving average, which is below the 50-day and, in turn, the 200-day simple moving average. Additionally, there is more than 10% between the 8-day EMA and the 34-day EMA.
Let’s assume you see this price action, and got into IBB long.
If you’re risk tolerant and were able to hold through some choppy trading, here’s how the trade would have turned out.
The Bottom Line
The pinball stock pattern is a good addition to your toolkit, but get plenty of practice scanning for this pattern before putting cold hard cash on the line. You’ll need to set hard stops; if you have a high tolerance for risk, those will be below your entry point or at the most-recent lows, whereas a more risk-averse investor should consider stopping out if the price breaks below the 8-period EMA.
Petra Hess runs PetraPicks.com. She is a technical swing trader and long-term investor in domestic and Canadian stocks and ETFs.