There are a multitude of technical patterns out there, but one that I’ve found that works consistently is the pinball pattern. It might sound odd to anyone who plays pinball — thinking that there’s no real pattern to playing the silver ball — and it’s important to know that the pinball pattern doesn’t always work, but this is a simple technical pattern worth looking for.
Pinball pattern explained
To identify whether a stock is exhibiting a pinball 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 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.
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