Micron Technology, Inc. MU’s chart exhibits a classic technical analysis pattern, which is why our team of technical analysts selected it as our “Stock of the Day.”
Technical analysis has a bad reputation.
But unfortunately, that’s just the way it is. Most technical analysts don’t understand that. They just mindlessly look at the charts and repeat what other people have said. They don’t seem to know what to look at.
However, when properly understood and applied, technical analysis is simply a graphical depiction of supply and demand trends in the market.
For example, when market leadership changes from bullish to bearish or bearish to bullish, the market may reverse and trend in the opposite direction which may show up on a chart as a “reversal pattern”.
When a current trend pauses before continuing, the action can appear on the charts as a “continuation pattern” – again, you can profit by being on the right side.
As you can see in the Micron chart, there is a bearish engulfing pattern: There has also been some interesting action in the options market.
This pattern indicates a bearish trend. Micron is likely to continue to rise. The open price was higher than the previous day’s close price.
However, before the market closed, sellers took control and pushed prices down significantly, even lower than the previous opening price.
Then another pattern emerged… a bearish flag.
This pattern indicates that the people who were causing the price drop have decided to take a break – they think that if they stop selling for a few days the price may rise and they will be able to complete their orders at a better price.
The result is a breakdown in trend, low trading volume, and sidelines, which shows up as a “flag” on the chart as the stock price rises.
The third pattern is the Bearish Breakaway Gap, which forms on the chart when sellers are very aggressive and ready to exit their positions without regard for price.
They just want to get out.
As a result, the opening price will be significantly lower than the previous day’s closing price. This action will show up on the chart as a gap or a level where the stock did not trade.
It is unfortunate that technical analysis gets a bad rap, but it shouldn’t. When properly applied and understood, technical analysis is an illustration of supply and demand.
Smart traders can use this analysis to their advantage.
Three bearish patterns on Micron’s chart suggest that this new downtrend is just beginning to form, and it’s quite possible the stock could move lower.
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Photo: NPS_87 via Shutterstock
