The Fry-Pan Bottom

The Fry-Pan Bottom

The Fry-Pan Bottom pattern is aptly named. It does not take a high degree of technical analysis to figure out the investor sentiment that forms a Fry-Pan Bottom. This pattern gets its name because it looks like a Fry-pan bottom. The pattern is a slow curving pattern to the downside, flattening out at the bottom, and then slowly coming up out of the other side of the pattern. The analysis for the investor sentiment is very easy to understand. Initially after a downtrend, the selling sentiment starts to wane, making the trajectory of the downtrend a slow inactive bottom trading pattern.

After a lengthy period of time, the sentiment almost becomes neutral, forming a flat area. This lack of interest eventually starts to incorporate a very slow change of investor sentiment to the plus side. The new positive outlook shows the same lack of enthusiasm on the buy side as it did on the sell side. However, the difference now becomes that the selling interest has disappeared. The buying interest is slowly coming back into the price. This pattern, unlike other patterns, utilizes the condition of the stochastics in an opposite manner. It is when stochastics are approaching the overbought conditions that investor sentiment can be gauged.

The alert for this pattern is activated when stochastics get up in the over­bought area. The price now shows that confidence has built back up into the price in the form of a large bullish candle or a gap up coming out of the positive side of the Fry-Pan Bottom pattern. This buying indicates that investor senti­ment has now produced confidence for being back in the position. A gap up becomes a signal to buy even though the stochastics are approaching or are in the overbought area. That enthusiasm, coming out of a long bottoming action, will usually create a strong buy trend.

Notice the long four-month period of time in Fig. 6-8, the Isonics Corp, chart that the investor confidence shifted. The telling factor for the potential breakout was the subtle Fry-Pan Bottom formation. A couple of simple ele­ments can be added to Fry-Pan Bottom analysis. The first being the very bottom of the Fry-Pan is approximately one-half the distance from the time the Fry-Pan Bottom started until it will break out. This is not anything that is set in stone. A simple observation is that the very bottom occurs in the middle of the Fry-Pan Bottom. Having this knowledge allows the investor to estimate when the breakout might occur.

This calculation does not need to be exact. Visually the buying can be seen as the confidence starts building back up. When the buying level starts approaching the same level as when the pattern started to develop, that is when to start taking action. In early October the Isonics Corp, chart started revealing some bullish candlestick formations. The volume started expanding. This now becomes evi­dence that the buyer’s confidence could create a breakout situation.

The confirmation of the breakout, after the Fry-Pan Bottom, comes as a large bullish candle or a gap up. This will usually occur near the high point of the beginning of the Fry-Pan Bottom formation. Whether you decided to buy this stock in the first few days of October or after the breakout occurred, does not really matter. After the extended period of time, it takes to form this pattern, buyer confidence has built up a lot of steam. The percentage move out of the pattern should be very large.

These patterns do not occur very often. Fortunately, when they do occur, they can be found and then followed without too much difficulty. That allows an investor to become well-prepared for taking advantage of the potential results.

Fig. 6-9, The W. R. Grace & Co. chart illustrates a very slow decline, fol­lowed by a ‘dimple’ at the very bottom of the pattern. Once it was interpreted that the buy signal was not creating the immediate buying one would hope for, the slow build-up of confidence could be seen. The Fry-Pan Bottom pattern creates a different analysis versus a stock price that is starting to get to the over­bought area, then seeing some exuberant buying. The breakout occurring after a Fry-Pan Bottom formation reveals a completely different scenario.

Training the eye to recognize how a pattern is setting up creates the opportunity to participate in a big profit move. The slow downtrend, followed by a slow uptrend, will have different results. When the trading gets close to completing the Fry-Pan Bottom formation, funds can start to be committed.

Because of the length of time the pattern takes to develop, they should not be a primary source for a trading strategy. However, this pattern can be used when the timing becomes apparent. Although they do not occur with great frequency the percent return produced makes the pattern well worth being able to recog­nize the formation.

Fig.6-10, The Regeneron Pharmaceutical, Inc. chart demonstrates analy­sis of a Fry-Pan Bottom pattern correctly. Whatever bad news generated the big sell-off in late March, the investor sentiment remained negative going into the latter part of April. Although the sentiment was not severely negative, it still was negative. A small bullish signal occurring approximately April 24 was the first sign of negative sentiment reversing.

This could have caused buying of that position. However, the lack of follow- through for the next few days would have revealed that no new extensive buying was coming into the stock. That may have produced a decision to move money elsewhere. The indecisive period continued, with very slow upward movement. That is what visually revealed a Fry-Pan Bottom formation.

As we have learned, a basic rule of a Fry-Pan Bottom is that the bottom usually occurs midway from the time the pattern starts to the time that a breakout occurs. The little “dimple” occurring approximately April 24 now becomes a timing factor. As the formation approaches the same timeframe after that dimple, it becomes time to look for a potential breakout. The second week of May becomes a good time to start adding to this position. The breakout, on big volume in mid-May, is definitely the time to be buying.

“Every man who observes vigilantly and resolves steadfastly grows unconsciously into genius.”

Although the breakout occurs with the stochastics in the overbought area, the breakout clearly illustrates that investor sentiment has grown. Everyone is con­fident, once again, to be in the stock.

Fig. 6-11 (following page), The Dynamic Materials Corp, chart may not clearly reveal a Fry-Pan Bottom until the latter stages of the formation. Buying in the second week of January, upon the formation of a Morning Star signal, or buying in mid- February after the three indecisive days formed right at the 50- day moving average pullback, may have been based on other factors. As the chart pattern moves into late February, the gap up has a different connotation to it, after being able to view the whole pattern, starting from the peak of late November.

What might have been analyzed as a Shooting Star at the top of a trading range in normal circumstances now should be analyzed as the potential breakout from a Fry-Pan bottom formation. This analysis, along with the stochastics not quite being in the overbought area, would provide more reason to hold the position, expecting more buying.

The Fry-Pan Bottom formation is not a difficult formation to analyze. It should be kept in your mental arsenal of potentially large trade results. Identifying its formation changes the basic rules of how to use stochastics with candlestick signals. Where most buy signals work effectively, when stochastics are in the oversold area, that rule does not necessarily apply in a Fry-Pan Bottom forma­tion. The slow buildup of confidence, witnessed in the slow uptrend, should be considered like the coiling of a spring. As it gets close to the same level as the beginning of the pattern, the potential for that spring’s energy to let loose becomes greater.

If a purchase of a position was not made in the latter stages of the pattern, the majority of the move can still be exploited once the breakout occurs.

“A man has no ears for that to which experience has given him no access.”