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Trade new high breakouts differently than markets retracing old numbersMARKET MECHANICS Most Pattern Cycles trading occurs at key intersections. Prior action prints complex S/R barriers. Price discovery then tests these constricted zones, which must eventually hold or fail. Classic swing strategies depend on these barriers to stop and reverse price. Momentum tactics expect them to break. When they do, bars expand in the direction of the violation. This common trending mechanism also displays a fortunate side effect for sleeping traders. Price often revisits the original breakout level and permits low-risk pullback entry. S/R takes many diverse forms. It may appear as a series of tops or bottoms, gaps, retracements, or a variety of other landscape features. Any straight set of three or more lines that extend outward yields a trendline that can stop price movement. When S/R methods intersect, they signal crossverification and odds increase that the predicted trading event will occur. Train the mind to see unique S/R on each stock chart and then concentrate on the intersecting points. The next profit hides there and waits for discovery. Bull, bear, top, bottom, breakout, breakdown, high, low. That’s about it. Pattern Cycles continuously repeat the same stages through all charts and time frames. Successful swing trading requires little more than accurate recognition of a stock’s current phase and waiting patiently for low-risk execution. Learn the characteristics of each stage and start to think in 3D. Consistent profits come from chart elements that align through several time periods. But concurrent trends often stand in conflict and yield unpredictable results. For example, many trading losses will come from buying one trend while another signals an immediate sale. Above all else, Pattern Cycles recognize the difference between bull and bear markets. Trend mechanics operate very differently through rallies and declines. Collar the position to the bull-bear axis and filter trades in tune with the predominant cycle. Countertrend entry works well but requires advanced execution skills. Don’t attempt it without extensive experience and careful planning. And avoid picking tops or bottoms in fast-moving conditions. The markets present much safer trades with equal rewards. Try to execute positions just as countertrend movement ends and the primary trend reasserts itself. These pullbacks, dips, and bear rallies shift reward:risk strongly in the swing trader’s favor. Trend mechanics exhibit frequent and predictable countertrend movement. The challenge during these times lies in emotional self-control. Success requires buying when fear says sell and selling when greed says buy. Profit at that critical moment depends on adhering to the prime directive of technical analysis: play the numbers and forget the story. PATTERN CHARACTERISTICS Congestion patterns swing between key S/R levels. They complete when a new trend leg breaks through this wall into directional price movement. This surge may be in the same or opposite direction as the previous one. A pattern between adjacent price moves in the same direction continues that trend. Alternatively, when a breakout turns backwards and retraces the last trend leg, that pattern reverses the prior move. All range patterns display a tendency toward continuation or reversal. This underlying bias generates their predictive power. Reversal patterns take longer to complete than continuation patterns. Swing traders exploit this tendency when they locate other congestion zones within the same trend and compare the bar count. Learn to recognize patterns well before they complete, and choose entry points where price momentum will likely erupt. Always keep in mind that reversal patterns tend to be more dependable than breakout patterns. Trend has only two choices upon reaching a barrier: continue forward or reverse. Pattern Cycles focus trading efforts toward the more likely result and point to low-risk execution levels that capitalize upon the event. But effective analysis must also consider that the opposite outcome could develop. Many times this pattern failure will yield a more profitable trade than the one originally planned. So always see if an execution in the other direction might make sense. Charts consistently offer early prediction of these events through unexpected behavior near common breakout levels. Price acts differently at tops and bottoms. Bottoms take longer to form, and declines from tops tend to be more vertical than rises off bottoms. This phenomenon illustrates a known gravity principle within the markets. Price bars appear to have a weight that influences their trend development. This odd tendency generates an inappropriate gravity bias that inhibits the ability to visualize dramatic rallies before they occur. Fortunately, self-therapy for this condition will cure it. Take a chart and throw it on the floor. From above, walk circles around it until you don’t know which way is up. The stroll confuses the mind and the bias will dissipate as hidden trade setups appear out of nowhere. The big move hides just beyond the extremes of price congestion. Intermediate highs or lows within the boundaries of a range point to major breakouts when price violates them. They also locate major fade levels where the smart money recognizes that ranges persist longer than trends. First identify these important features through examination of the charting landscape. Then, rather than jump in with the crowd, wait for the herd’s reaction to these pivots before deciding which way to make the trade. UNDERSTANDING PRICE BREAKS Trade new high breakouts differently than markets retracing old numbers. A special condition signals when stocks trend through new highs: no built-in supply of losers exists within that time frame. Price can easily go vertical when supply doesn’t overhang the stock from a larger trend. Pullback strategies often fail in this environment. During these momentum markets, swing traders may need to enter near highs rather than pullbacks and manage risk without close support under positions. One typical signal for a new high momentum trade prints a tight flag at the top of expanding price right after a breakout. This common pattern appears on both 5-minute and weekly charts. As trends jump to new highs, bars congest while price searches for the next crowd to carry it higher. Congestion near the top of the range generates strong demand that attracts the needed greed. Price pierces the top of the flag and ejects into a vertical move. Breakouts and breakdowns attract many participants but require precise timing to turn a profit. Insiders know that these hot spots attract dumb money. They initiate whipsaws after each volume surge to shake out weak hands. This ensures that the majority enters positions just as the market reverses. Swing traders rarely run with the emotional crowd and never with these frantic momentum plays. Effective momentum trading requires thorough analysis of the intended execution level before price strikes it. Plan to enter the position right at that number or pass up the trade. These volatile conditions may require breaking some of the rules that govern normal risk management. For example, a pre-open limit order might provide the best entry for a hot stock when many participants avoid this strategy at other times. Swing traders can join the momentum club, get filled way above their comfort level, and still walk away with a nice profit. But this practice will crush their hopes of success over the long term. Breakouts and breakdowns consistently lack easy escape routes. This fast-paced environment will chew up participants that don’t rely on flat stop losses. And glamorous momentum positions can trigger heavy losses but still maintain all the technicals of a good setup. That’s a formula for disaster. Flat percentage or dollar stop losses will avoid serious problems. But swing strategy depends on price pivot behavior against known S/R barriers. New high trends often display no simple price floors. Whenever possible, enter breakout trades close to the point that proves the setup was wrong if price violates it. And consider that markets offer tremendous opportunities that don’t rely on strong momentum. • Three strikes and you’re out. Price should break out of a pattern no later than the third time a key price point is tested, to the upside or downside. Failure of price to reach the third test in either direction favors a breakout in the opposite direction. • Use the rule of alternation to predict how a pattern will develop. Corrections should alternate between simple and complex shapes in a series of impulses. • Every pattern has an underlying positive or negative appearance that represents the likely outcome. So if it looks bullish or bearish, it probably is. • The sharp breakout above an ascending triangle often signals the climax of an entire series of rallies. • Rising wedges can lead to very powerful upside breakouts, but they are too undependable to enter until the move is underway. • Demand perfection on the inverse head and shoulders reversal. They attract attention only when every rule is fulfilled: the neckline must line up correctly, the two shoulder lows must be at the same price, and the breakout must pierce other known resistance (MAs, gaps, etc.) on high volume. • Double triangles that form after strong rallies are very bullish for a new move of equal size to the one that occurred just before the first triangle. • The contraction in price range and volatility that follows a new pattern seeks a natural balance point corresponding with the location of the new impulse. Use Bollinger Bands and rate of change indicators to identify this pivot in advance. • Every pattern is a solvable puzzle defined by support, resistance, and volatility. Look for highs and lows to point to a natural exit spot in time. Volatility should decrease into this apex and expand out of it. • Volume should dry up as each of the three rallies comprising the head and shoulders pattern uses up all the available bull power. The lower the volume on the right shoulder rally, the higher the odds that the neckline will eventually break. • Excellent long trades on the head and shoulders can be initiated at the right shoulder neckline when accumulation diverges positively from the bearish pattern. Also watch closely when the neckline breaks but price immediately pops back above it and indicates that few stops were waiting. • The deeper the downslope of the head and shoulders neckline, the greater the prospect for a bearish break. Stay away from ascending necklines completely. These patterns easily evolve into sideways motion. • Calculate the Fibonacci relationship between the left shoulder peak and the head length of the head and shoulders pattern. If the left shoulder topped at a Fib retracement such as 62%, the right shoulder should go no higher and may be a good short sale entry point. Breakouts and breakdowns tend to occur in waves. Quite often each surge prints at a similar angle, duration, and extent to the one that precedes it. Use this tendency to predict when the break will occur and how many points that price will move when it ejects. Between each sharp thrust, price will often stop and congest until volatility winds down and stability returns. Trade analysis yields the greatest benefit right at this point. Study the prior waves and locate any trendlines or chan nels. Count the number of bars within prior congestion zones. Locate the S/R level where a violation will likely trigger the next trend wave. Look at price ranges for the last few bars or candles. Do they narrow or expand? Plan the setup now and decide what to do if the stock gaps through S/R on the next bar. Price breaks often stop dead after the first surge and pull back very close to the original S/R barrier. This second chance provides an excellent entry point. Although momentum traders watch their profits drop as the market retraces, the underlying technicals actually strengthen and encourage new entry. Sometimes price will jump back through the barrier that ignited the original breakout and drop into the old range. But if the break occurred with good participation, pushed well out of old congestion, and volume dries up during the pullback, get on board fast. The countertrend will rebound quickly and with little warning. Action speeds up as price breaks free of congestion. Expanding bars or candles reflect surging momentum, regardless of time frame. Expansion equals profit. Swing traders who enter the first pullback try to pocket a big piece of the next price thrust. This strategy becomes extremely important in exit planning. Natural bias assumes that the position should be held until momentum and price movement slow. But this exposes a large profit percentage to natural retracement. Protect the position by using bar expansion patterns to signal the exit. Combine this method with Bollinger Band resistance and grab a high profit exit just as the market turns against the crowd. |
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