Angle of Ascent

Happy (almost) forth of July Traders and Investors, we hope you will enjoy your time off!

Remember markets close early today at 1PM Eastern.

I wanted to take some time this morning to discuss a matter of great importance: Angle of Ascent.

The nature in which a stock or index is moving up (or down for that matter as this concept can be inverted and used when prices are moving lower as well), is something that should be studied and well understood in order to best navigate stocks and markets.

As with all the concepts we talk about, understanding the angle of ascent in a stock or index’s price action is a way to understand the cycles and patters that occur in price movements.

Prices change character and therefore their behavior in phases and this can be observed as prices move in certain stocks and markets.

As a directional move in a stock gets to the point of exhaustion and either all the sellers have finished selling, or all the buyers have finished buying, a stock will usually start to settle down and move sideways for a period of time to consolidate all the price movement that has recently occurred.

During this time we can usually identify that prices have stopped making moves up or down in “price discovery” mode and have begun moving sideways in “price acceptance” mode.

This is the time when you attempt to enter the trade in order to be in position to benefit as prices “lift off” into price discovery.

Now this is the part where the Angle of Ascent comes into play.

Stocks very often will make moves in varying degrees of potency.

First they start off in a gradual ascending trend. This trend usually has about a 25 degree angle.

twentyfivedegrees

 

Next as things get a little more excited the trend will get a bit more extreme and hence the angle of ascent will also become more extreme. At this point the trend usually has about a 45 degree angle look.

fortyfivedegreeangle

 

This is where it becomes clear the angle of ascent has become extreme as prices move higher much faster than in the previous example.

After this the final phase will often emerge in prices exploding higher one final time in a giant wave of enthusiasm causing the prices to move up at an extremely rapid rate of ascent.

At this point the trend will usually have about a 75 degree angle of ascent.

seventyfivedegreeangle

 

It should be obvious to you at this point that this level of enthusiasm to the upside is most likely going to be short lived, and more importantly signals that the trend has most likely ran its course and will soon begin to show signs of slowing down.

To use this analysis to your benefit in trading or investing situations, the objective is to enter when at a time of consolidation and near the end of the pattern in relation to time, as we have previously discussed, then monitor the current state of the trend by applying this “angle of ascent” analysis to price action within the trend.

Let’t take a look at an example to drive the point home. Have a look at the chart below and we will discuss the obvious angles of ascent present in the chart’s price action.

GBTCexample

As you can see the trends in price action go from steady and gradual, to a bit more rapid and quickly rising and eventually to that unsustainable 75 degree angle you see at the end of most momentum charts.

Study this concept well, and apply it to your trading and investing habits. It will not fail you in keeping you out of the “crash” phase which often comes after an extreme enthusiasm trend higher.

Have a happy 4th of July and we’ll see you back here Thursday! All the best!

-JP

 

 

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2 thoughts on “Angle of Ascent

  1. Wonderful post JP! Another example that comes to mind would be $TRXC this past month. That ripped from high $3s all the way to $6, and now back to high 3s. In some cases like this, I like to buy a couple of put options expiring in a month or so when I feel the stock is running out of steam to go any higher. What goes up, will eventually go down. 👍

    • Thanks Tony! Glad to hear the concept makes sense. I agree that attempting to catch the move lower after the enthusiasm is often a worthy endeavor. You get to capitalize on that “broken elevator” or “waterfall” action. 😉

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