Find the Pattern with Better Trades
I am chartist and a technical trader. I believe that the first line of analysis is to find patterns. Line drawing and straight line analysis is the standard. It has been and continues to be the base line tool. Moving averages and range bands are more recent developments and are observatory. Straight line charting has modeled and been used to define patterns and set targets for an awfully long time, and I believe that you can't throw a pile of lumber of a cliff and have it land in the shape of a house. If it looks like a house, some one has manipulating the lumber.
I want to show you a study that is remarkable in that it shows obvious pattern trading but not in a single stock rather an entire index, in this case the NASDAQ. The slides here are chronologically sequential and can not be put together after the fact to make a point. They were annotated and posted as they happened and were charted in my Trader's Talk Live training sessions. I have a group of students who subscribe to spend several hours per week charting and being trained to read and trade off chart patterns. What you will see is the break of a trend and the steps it takes to morph into a new trend.
Note that the lines were drawn before the pattern fully developed, demonstrating that the pattern was recognized and laid out before the price played into the lines. Now the pattern could have broken at any time. The lines did not dictate what the stock / Index could or could not do. Rather the lines showed the pattern and the targets that would be reached if the pattern continued. Each pivot point that was reached gave an opportunity to trade off the price reaction to a critical decision point.
Feb 23rd the index dropped to recent support rally with the up trend line just below. A lower top also was formed. We identified the support and noted that the long term line was just below.
Now, notice that the next day held support but reached down intraday to bounce off the trend line. As it moves up it stalls in line with lower tops forming a wedge pattern. Now it is a powerful pivot point as descending tops collide with a long term support trend line. A move to the upside is a break out the target will be 2155. A break in the support line gives weight to the developing down trend.
The next day drops right to the support line the break down signals the end of an uptrend that began in March 2003 and changed angles in November 2003. It moves on down to the bottom of the trading range of the new trend. This set up is another Obvious Bracket Trade. The Resistance line is defining the current trend and the Support and resistance lines show that there is attention being paid to the target points. The pile of lumber is taking the shape of a nice house.
As a double bounce / bottom pounds the support line, the upside target is the top of the range at about 2020. The downside targets would be sliding down the support line or dropping to the next hard price support of 1900, the last major rally point.
Two days later, the big gap and drop to 1900 signals the recognition of the support area. Returning to previous rally points is a common pattern. From here, the market sentiment can be accurately tested. The public is not the critical catalyst here. The big traders here will be testing to see if the public is finished selling off. If there is equilibrium, the public / market may be ready to follow a lead to the upside.
Try as you like, you will not find news to explain what happens the next three days. To quote an analyst on CNBC who speculated at length about what prompted the big move last Thursday," I guess we don't really know".
Well, I will tell you this. The folks who lit that fire were careful to choose that day to test fire the rocket. All of the markets had reached support levels from a trend line / straight line analysis point of view (see the commentaries for the last three weeks).
In our Trader Talk Live sessions we chronicled this as it happened and had opportunities to trade the many stocks that were doing the exact same dance steps.
This morning we are right at the next target. We moved there in the first hour and stopped. It has been an hour so far and it is still there. Gee, do you think that maybe the traders already knew that 1995-2000 was the limit of the current pattern and that many traders would be very ready and willing to take profits here at an obvious pivot point? Now will they? I don't know... I am not on the floor. But I don't have to be there to see the targets. When they get there, there will be a struggle to test the waters. If the buying frenzy will not give way to some shorting or profit taking there could be a test above the mark to see who wants to play. Either way... the pattern speaks volumes to the premise that in the midst of what may seem like randomness there appears to be a guiding hand. Look folks, there is too much money on the line not to have serious efforts to create some predictability.
Most all indicators and averages etc. are following and at best interesting after the fact. Some are predictive and highly accurate in reflecting behavior but Pattern Analysis of the price action and the targeting the next likely TEST of the market sentiment is the closest and most accurate way to get close to the game. You are likely not the Key trader in a stock or an index fund. Most likely you are not one of the Professional institutional traders that follow the Key Traders or the Fund managers that pick up on the momentum building on the floor. The masses take their Queue long after the test and subsequent direction has begun and your participation in the end will be necessary to move the stock or market on toward the testing point.
While I do use a very few indicators (MACD, WRSI, Stochs) they are consultants and are never reason I trade. The actual movement across a trigger price, whether it agrees with the indicators or not, dictates the trade. Now the indicators I use are highly accurate but guess what folks... they are never as accurate as the price. I routinely train my students to trade with out any indicators and they are surprised that they consistently make money by only trading price action and patterns. However there is one tool I insist on trading with and that is Candle Sticks. They is not an indicator, they are my hidden camera in the competition's board room. But that discussion is for another day.
The pattern tells me when we reach a pivot point (significant price); the indicators give their best intelligence on the disposition of the trader's momentum and attitude. That lets me set up legitimate criteria to make a trade. If /Then for the upside and If/Then for the down side. Armed with all that, I sit back and let the Stock / Index do what it will do. The key traders engage the masses and the spark either lights a fire or it doesn't. I can't know for sure what they will do and while I could say "my indicators suggest ...so I am going in", is would be a glorified guess that screams "I don't know how to wait for the stock to tell me it's time. I will trust the indicator that seems to be right a lot of the time and cross my fingers". I'll tell a secret, the Key Traders, and the Pros that will follow them, are not looking at range bands, moving averages and overbought /over sold indicators. Their actions are making those indicators say what it says. They are doing a delicate dance with the real momentum of the market, the masses. They do not want to go against the public sentiment. They want to test / read that sentiment and drive the leading edge of the next cycle of the pattern.
I love this stuff! I have many maxims that I use to help keep perspective. "The stock will never listen to you, but it will speak if you learn to listen", "Find the pattern and play it till it breaks", " If there is no pattern, there is no trade".
Not all stocks and or indexes have easy patterns to follow but where there is big profit potential, there will be a pattern. Just because you can't see it, does not mean it is not there.
The NASDAQ price action over the last year is a very beautiful house and that pile of wood did not land that way by random action. While some Technical indicators are often accurate at predicting price action, the market is right ALL the TIME! Find the Pattern and play it till it breaks.
PS. It takes a while for me to write an article like this. I came back to finish the editing and it is now 4 hours into the market. You gotta' see thisÖ
So, where does it go from here? I don't know but it is obvious to me that the key traders know exactly where they are. They also have targets and all I have to do is find the up and down targets and when they take off I will follow. Remember, you don't have to guess, "Find the patternÖ it will speak to you".