With so many stocks trading down 60-70% or more, its tempting to bet on reversals for quick gains.

Catching a falling knife, though, can be treacherous.   I’d rather see technical evidence that selling is exhausted.  Most traders consider this to be the same as capitulation, and look for proof of it in high volume selloffs or candlestick patterns.

I don’t find that these approaches work particularly well for microcaps.  Instead, I want to see a pattern of market fluctuation where price action drifts without causing severe breakdowns to new ranges.

One of my favorite reversal patterns is a shallow declining wedge following a long, steeper downtrend.  New Gold (Amex:NGD) is a perfect example.

Get trend analysis for NGD from Ino.com

There are two ways to play the pattern.  Either you can wait for a high volume upside breakout of the declining wedge, or you can buy near the lower line of a defined wedge with a tight stop.  I used the latter approach for New Gold, buying shares at $.78-$.80.  So far, so good.

DISCLOSURE: Long NGD.

Related posts:

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