UNDERSTANDING SPRINGS AND UPTHRUSTS IS A TECHNICAL ANALYSIS MUST

When is a break of support bullish and the breaking of resistance bearish? When these events turn out to be either springs or upthrusts, the name given to these technical patterns by legendary technician Richard Wycoff.

Both springs and upthrusts are examples of false breakouts and can trap the unsuspecting trader. Both patterns quickly reverse and the stock then often tests the opposite end of the trading range. A spring is a false breakout to the downside. It is so named because prices "spring" back. An upthrust is the opposite event--prices temporarily break out above resistance only to retreat almost immediately after.

The quality of the spring or upthrust can be judged by an examination of the degree of penetration of support or resistance and the volume on the day this penetration occurred. These four scenarios are possible:

-- Large penetration on large volume
-- Large penetration on small volume
-- Small penetration on large volume
-- Small penetration on small volume

For a spring, a small penetration on small volume is bullish since it indicates there are few sellers who are willing to give back their shares below support. For an upthrust, a large penetration on large volume is bearish because it shows that the bulls could not sustain higher prices despite the activity.

Springs and upthrusts both provide the swing trader with good opportunities. A stop loss can be placed just below or above the extreme of the day the spring or upthrust occurred. A target is also created since the stock is likely to test the opposite end of the trading range.

A good recent example of a spring occurred in the stock of Linear Technology (LLTC, $36.22). Since June, LLTC has been in a rectangular trading range with resistance at $40 and support at $34.50. Despite this consolidation, however, the stock, like most semiconductor shares, has been trading below a declining 150-day moving average characteristic of a stage IV decline.

On Wednesday, LLTC broke support trading down to an intraday low of $34.01 before recovering near the close to end the session at $34.50. The candle was a high wave, with a small real body and large upper and lower shadows. High wave candles indicate a war between the bulls and bears with neither side being able to claim victory. Volume on the day was about 7.5 million shares, about 50% larger than normal. I would classify this session as a small penetration on large volume. It made the stock worth watching in the following sessions.

On Wednesday evening, Texas Instruments held its mid-quarter update. Although its forecast was not that strong, it served as a catalyst for what appears to be a violent short-covering rally in beaten down chip stocks. LLTC rallied with the group and finished Friday's session at $36.22, springing back more than $2 from Wednesday's low. The stock is now challenging a downtrend line from its late July high of $39.74. If it can break that trendline, a movement back into the upper end of the trading range near $40 appears likely.

A knowledge of springs and upthrusts turns false breakouts from threats into opportunities. As a swing trader, you should always watch what happens after a breakout to confirm the stock is behaving as it should. If it isn't, the issue may still provide an excellent trading situation if you spot a spring or upthrust in the making.

Good trading!

Dr. Melvin Pasternak
Editor
The StreetAuthority Swing Trader